Friday’s report on unemployment and job creation was supposed to provide the deciding piece of evidence for Federal Reserve officials on whether to raise short-term interest rates for the first time in nearly a decade. Instead, the mixed economic news added to the uncertainty.
The US unemployment rate in August fell to 5.1 percent, the lowest in seven years, the Labor Department reported, but the economy added a modest 173,000 jobs, the weakest job growth in five months and far fewer than the 217,000 that economists expected.
As a result, it’s unclear whether the Federal Open Market Committee on Sept. 15-16 will go ahead with a quarter-point increase to its benchmark rate, which has held near zero since the end of 2008.
“The Fed is going to move in September,” said John Silvia, chief economist for Wells Fargo & Co., in Charlotte, N.C. “They are going to raise rates.”
“The Fed will likely hold off,” said Gregory Daco, chief of US macroeconomics at Oxford Economics USA in New York, citing the recent turmoil in markets around the world. “There are some relatively important global headwinds.”
As recently as three weeks ago, a Fed rate increase seemed a sure bet as the US economy continued to expand and add jobs at a solid pace. But news of weakening Chinese economy — the world’s second biggest — has sent stocks tumbling from Shanghai to London to New York, raising concerns of a global economic slowdown that could derail the US expansion.
US stocks, after rallying earlier this week, fell sharply again Friday following the jobless report. The Dow Jones industrial average fell 273 points, or about 1.7 percent, to 16,102. The broader Standard & Poor’s 500 index slid 30 points, or about 1.5 percent, to 1,921, and the technology heavy Nasdaq Composite declined 49 points, or about 1 percent, to 4,684.
The question facing the Fed officials is whether the US economy, still healing from a historic recession that officially ended in 2009, is strong enough to absorb higher interest rates, which the Fed uses to prevent the economy from overheating and sparking runaway inflation. Once the Fed begins raising rates for borrowers, the effects will ripple through the economy in the form of higher costs for mortgages, credit cards, and business loans.
The debate has divided economists, business leaders, investors, and Fed policy makers. Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, said Friday that the August jobs statistics were “pretty much right down the middle of the fairway sort of employment report” and supported a rate hike.
Federal Reserve Bank of Boston president Eric S. Rosengren declined to comment on the report Friday but said earlier this week that delaying a rate increase for a month or two would have little to no broader economic impact. He added that once the Fed starts increasing rates again, they are likely to rise gradually.
The employment report provided support for both sides of the debate. Despite the weaker-than-expected job growth in August, the US economy generated an average of 221,000 jobs a month from June to August, compared with 189,000 in March through May, Silvia noted.
Revisions by the Labor Department showed that employers added 44,000 more jobs in June and July than previously reported.
The August numbers could also change; historically, August is the month with the greatest revisions.
In the report, wages ticked up: Average hourly earnings of private sector workers rose 8 cents last month to $25.09.
“The dominant US economy is doing fine,” Silvia said.
Daco, however, noted that job growth has slowed from 2014, when the nation added an average of 260,000 jobs month, compared with 212,000 this year. Daco said inflation remains well below the Fed’s 2 percent target, while a stronger dollar is raising the cost of US goods in foreign markets and slowing exports.
Given these factors, Daco said he expects the Fed to wait longer before raising rates.
“Overall, we still have a very cautious Fed,” Daco said. “That hasn’t changed.”