Employment Gains Pave the Way for Interest Rate Increase

Wednesday’s employment report provided further evidence that the U.S. labor market is gaining strength. According to the monthly report published by payroll services firm ADP, another 210,000 jobs were created in March marking the sixth straight month of employment gains after several months of losses. In addition to these gains, when compared to last year, the number of planned layoffs in March fell by 39 percent to 41,428 according to statistics tracked by executive placement service provider Challenger, Gray & Christmas.

If the ADP result is confirmed by the Non-Farm Payroll report scheduled for release this Friday morning, the U.S. economy will have created more than 450,000 jobs since the beginning of the year. In the last two quarters, the number of new positions created will be nearly one million.

Despite the predicted increase in jobs this month, the overall unemployment rate is expected to remain at 8.9 percent for March. This is clearly a vast improvement from the 10.0 percent recorded at the end of the fourth quarter but it is a far cry from the five to six percent unemployment which was the “norm” in the years immediately prior to the recession.

So, with unemployment improving, and the economy seemingly on the rebound, should we expect an interest rate increase in the near future? Probably not based on recent comments from Fed Chair Ben Bernanke.

In his testimony before the Committee on Banking, Housing, and Urban Affairs earlier this month, Bernanke made it clear that until conditions show significant improvement, the Fed will hold the line on interest rates for an “extended period”.

As part of his address, Bernanke identified three criteria that must be met before the Fed will consider hiking rates. First off, Bernanke said there must be a marked improvement on the employment front and most would agree that 8.9% unemployment simply fails to meet this standard.

Next, Bernanke said the Federal Open Market Committee (FOMC) must be convinced that the economy has entered a sustainable period of recovery and the rate of inflation must climb to the point that it threatens to exceed the Fed’s mandated target of 2% annual growth. There is no question that, on most fronts, the economy has made gains this quarter but based on Bernanke’s own requirements, we still fall short of the conditions necessary to force the Fed to raise rates.

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