Weak employment report makes Fed action on interest rates difficult

Trying to apply logic to the stock market, economy and the actions of the Federal Reserve can be a very big mistake. And the actions of the past week make that very clear.

The Department of Labor reported on Friday that U.S. payrolls rose by 142,000 in September, well below expectations. Even worse, a weak employment report for August showing a gain of 173,000 was revised lower to 136,000, and the July payroll update was also adjusted lower.

"The Federal Reserve has placed a high weight on labor data in establishing the criteria for an interest rate increase. So we have to say Friday's labor data reduces the likelihood that the Federal Reserve will increase the fed funds rate in October. That said, Federal Reserve Bank of San Francisco president John Williams said he expects the Fed to raise the fed funds rate this year, hinting the October 28 date was still in play," said Robert Dye, chief economist at Comerica Bank.

Despite the anemic growth in payrolls over the past few months, most people have a positive opinion about the job market. The Conference Board's report last week of the consumer confidence index found 25.1 percent of people said jobs were "plentiful," up from 22.1 percent a month earlier.

Forecasting the rate of growth in corporate payrolls has proven to be just as difficult as trying to guess when the Fed will raise the shortest of short-term interest rates. To be sure, everyone has an opinion.

James Bullard, president of the Federal Reserve Bank of St. Louis, chimed in on Friday suggesting the time has come to begin raising rates in order to extend the length of the current expansion.

"This would be done with the understanding that policy would remain extremely accommodative for several years, even as normalization proceeds, and that this accommodation would help to mitigate remaining risks to the economy during the transition," Bullard said.

Where there is agreement about the Fed and interest rates is that when the tightening begins it will be a long, drawn out process closely monitored by the need to control inflation.

Perhaps the most volatile reaction to the unknown path for interest rates actions by the Fed and the growth in payrolls that repeatedly comes in below expectations is in Wall Street's wide swings in the past two weeks.

After the Fed meeting at the end of September, when it was decided they would leave rates unchanged because of uncertainty in the global markets, stock prices tumbled, contrary to conventional wisdom a rate hike would be the impetus for a sharp decline in prices.

Friday's jobs report clearly showed an action by the Fed to begin the rate hike process would be more difficult. The knee-jerk reaction to the report was to take the Dow Jones industrial average down by 250 points in the first half-hour of trading.

However, by the close of trading, the Dow was actually up 200 points, a move of 450 points from bottom to top, marking the biggest one-day swing in prices in four years.

It is safe to assume the Fed policy on rates, the growth of the labor market and the reactions of the stock market will all continue to be erratic.

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