After May Jobs Report, Economists Warn Against Federal Reserve Rate Hike

06/05/2015 05:51 pm ET | Updated Jun 08, 2015

The May jobs numbers are being hailed by many analysts as evidence that the job market is growing at a healthy pace and the Federal Reserve should soon raise interest rates.

But amid the general optimism, liberal-leaning economists and activists warn that a rate hike in 2015 would be premature, noting that job gains have yet to translate into significant wage growth.

On Friday, the Bureau of Labor Statistics reported that the economy created 280,000 jobs in May, the highest monthly figure since last December and higher than the average rate of monthly job creation in the past 12 months. The announcement was received with relief by market watchers concerned over the economy's 0.7 percent contraction in the first quarter of 2015.

The rosy numbers renewed anticipation of an interest rate increase by the Federal Reserve. The Fed indicated in a late April meeting that it was unlikely to raise rates in the June meeting of the Federal Open Market Committee (FOMC). This led many analysts to predict an increase at the subsequent FOMC meeting in September.

The upbeat declarations of Justin Wolfers, an economics professor at the University of Michigan, exemplified many economists' generally optimistic reactions. “The only person to lose a job this month was grumpy Gus, the gloomy gainsayer,” Wolfers joked on Twitter. While wage growth was still modest in May, Wolfers noted that low overall inflation meant that small wage gains have a bigger impact than they would normally.

Hourly wages rose an average of 0.3 percent in May, making them 2.3 percent higher than they were a year ago. In the past 3 months, wages have grown at an annual rate of 2.9 percent.

The latest news strengthened the case for, and likelihood of, a Fed rate hike before the year’s end, Wolfers said.

Diane Swonk, chief economist at Mesirow Financial, concurred, calling the uptick in labor force participation “particularly welcome news” for Fed chair Janet Yellen.

Nearly 400,000 Americans returned to the labor market in May, bringing the labor participation rate up slightly to 62.9 percent from 62.8 the month before and the official unemployment rate to 5.5 percent from 5.4 percent in April.

“The clock is ticking again on a September liftoff in interest rates,” Swonk wrote in a blog post.

Liberal-leaning economists emphasized that May's increases remain inadequate and fragile. These economists and a coalition of progressive activists have long argued that the Fed needlessly prioritizes concerns about inflation at the expense of higher employment and wage growth.

On Thursday, The Huffington Post reported at length on their efforts to make a pro-wage growth Fed policy a top progressive cause. Multiple economists told HuffPost that the Fed should wait until annual wage growth reaches at least 3.5 percent before raising interest rates. That wage growth target is still 0.6 percent higher than the annualized rate of 2.9 percent of the past 3 months.

Moreover, the rate of job creation is still well short of what is needed to accommodate the growing population, Elise Gould, senior economist at the Economic Policy Institute, argued in a written response to the jobs report Friday. Even if the economy creates jobs at the May rate for months to come, it will not have enough jobs for all the workers who need them until August 2016. The Economic Policy Institute estimates that the economy needs 3 million additional jobs to account for workers who left the labor force, or never entered it, since the recession, as well as growth in the labor force since then.

“The Fed should not feel comfortable raising rates in September—in fact, they shouldn’t even begin to think about having a conversation about raising rates until 2016,” Gould wrote.

Meanwhile, 8.7 million people seeking work still cannot find a job. Unemployment remains particularly high among African-Americans, with an official unemployment rate of 10.2 percent.

Connie Razza, director of strategic research at the Center for Popular Democracy, which runs Fed Up, a campaign for a more progressive monetary policy, said in a statement that job gains have not materialized for women and people of color at the same rate as for the overall population.

Consequently, Razza said that keeping interest rates low is “the only monetary policy option that supports an inclusive recovery.”

Opponents of a rate hike got a high-profile boost Thursday when the International Monetary Fund asked the to Fed wait until 2016 before raising interest rates. Although the IMF recommendations came before the May jobs numbers were announced, they focused on longer-term inflation trends that were not significantly affected by the new data.

“The inflation rate is not progressing at a rate that would warrant, without risk, a rate hike in the next few months,” said Christine Lagarde, the IMF's managing director, in a press briefing.

Lagarde even suggested that the Fed should be willing to allow inflation to exceed the Fed’s target rate of 2 percent.

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