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Might the US Labor Market Fuel a June Rate Hike?

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US labor market

The US labor market has, for the most part, been strong. The Fed’s April 2016 minutes said that job additions averaged nearly 210,000 per month in 1Q16. Importantly, the labor force participation rate—one metric that measures slack in the US labor market—has increased, while the numbers of unemployed and people not actively looking for jobs have decreased.

The FOMC (Federal Open Market Committee) April minutes stated that “many participants judged that labor market conditions had reached or were quite close to those consistent with their interpretation of the Committee’s objective of maximum employment.” Notably, “maximum employment” is a situation in which unemployment can’t be reduced further without a sharp rise in inflation.

Might the US Labor Market Fuel a June Rate Hike?

The mining sector continues to be hurt, however, as mining activity has declined substantially, hurting stocks like Alcoa (AA), Nucor Corporation (NUE), and Steel Dynamics (STLD). Manufacturing is not in great shape either. But other sectors are doing well in terms of job additions.

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Fueling policymaker confidence

It isn’t extreme to say that the strength of the US labor market is largely responsible for policymakers being so positive about a rate hike in June. The expectation is that a strong labor market will eventually lead to an increase in household spending. This will not only increase economic output but also fuel inflation, thus requiring a rate hike.

If consumer spending (XRT) declines, mutual funds like the Franklin Growth Fund Class A (FKGRX) and the Vanguard PRIMECAP Fund Investor Shares (VPMCX) would be negatively impacted, because they do not have big chunks of their assets invested in stocks from the sector.

Job additions

A word of caution, however. Job additions in April were sharply down from 208,000 in March to 160,000. These minutes pertain to the April meeting, and the April job additions had not been released by that time. If job additions remain subdued in May, policymakers may need to rethink the possibility of a rate hike in June.

Apart from the US labor market metrics, policymakers will also look at inflation—the key reason a hike did not take place in April. In the next part, we’ll take a look at how policymakers just weighed in on inflation.

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