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The Federal Reserve now has the cover it needs to take a pause in raising interest rates.
According to CBS MarketWatch, slow job growth in July means the central bank is likely to keep overnight lending rates at 5.25% after next Tuesday’s (Aug. 8) monetary-policy meeting.
The July employment report was universally soft. Virtually every data point underscores the slowdown in the U.S. economy that the Fed has been looking for ever since it began raising interest rates two years ago.
Consider:
• Jobs growth has averaged 112,000 in the past four months, down from about 170,000 a month in the prior year.
• The unemployment rate jumped back to 4.8%, as the household survey showed a loss of 34,000 jobs in July.
• The average work week was unchanged and hours worked rose just slightly.
The details of the report also showed that hiring weakened further in key sectors in July.
Fed Chairman Ben Bernanke has said higher wage growth need not be inflationary, since profit-fattened companies can afford to pass along productivity gains to workers without raising prices.
The Fed has been seeking the market’s permission to pause, said Ethan Harris, chief economist for Lehman Bros., ahead of Friday’s payrolls data. But first, the Fed had to regain the trust of markets that it would not be soft on inflation.
Tough talk about the perils of “unwelcome” inflation and a couple of rate hikes proved the Fed’s mettle.
A string of weak jobs reports now shifts the Fed policymakers’ task away from fighting inflation and toward maintaining economic growth. While the Fed must stay on top of inflation, it also has the task of keeping the economy running along.