MNI EXCLUSIVE: Surprise Job Rebound Won't Likely Shift FOMC

By Jean Yung and Evan Ryser

     WASHINGTON (MNI) - A stunning rebound in May employment won't be taken at

face value by the FOMC, which next week will mull further support for the

economy as pandemic restrictions are loosened, former Fed officials told MNI.

     Employers added 2.5 million jobs, the Labor Department said Friday,

bringing the unemployment rate down to 13.3% from April's post-war high of 14.7%

and suggesting the recovery may have come faster than thought. That was a huge

surprise for analysts who had expected millions more in job losses and 20%

unemployment. 

     Former Fed officials said it would take more time and much more evidence to

back up the positive jobs report before the FOMC concludes the labor market is

healing rapidly. Fed Chair Jay Powell will likely defend the need for additional

fiscal relief after a kneejerk pullback in support for a new stimulus package

among White House advisers Friday.

     "What we saw this morning is one piece of fallible, partial evidence that

we've perhaps taken a step upward from a deep hole. Even if that proves correct,

we're still very deep in the hole," former Fed Board research director David

Wilcox told MNI. 

     "The worst adverse effect is it may bring further consideration of

additional fiscal action to a halt and that would be an enormous mistake at this

point." 

     --RISKS ASYMMETRIC

     The potential cost of the Fed's drawing an overly optimistic conclusion

from the May employment report are one-sided for policymakers, Wilcox said. 

     Giving too little support will likely cause permanent damage for tens of

millions of workers, disproportionately affecting new labor market entrants and

persons of color. The USD600 a week boost to unemployment aid offers a lifeline

to millions of households, but efforts to extend the benefit after July is

stalled in Congress. 

     "Chairman Powell will still say that there is some fiscal work that needs

to be done -- that cities and states need support and that businesses will see

some strain," former Fed Board director of monetary affairs William English told

MNI. "It does suggest a little less need to provide additional fiscal stimulus"

and the stimulus is "a little bit less time-critical than before the report."

     The collapse in economic activity because of Covid-19, even if it turns out

to be more temporary than previously expected, still drives inflation further

away from the Fed's 2% objective. That adds to the argument to run the economy

hotter to compensate.   

     "The communication they have given has been reasonably effective that they

will keep rates low for a long time," English said. "At some point they will

want to engage in good old fashioned QE and longer-dated asset purchases."

     --STONE IN A MOSAIC

     Powell will likely reference the full range of economic indicators, of

which the jobs report is just one, to paint the picture that the U.S. economy

remains very weak in his press conference next week, sources said. 

     The BLS employment report said manufacturers added 225,000 jobs last month,

yet purchasing managers indices earlier indicated a deep downturn. IHS Markit

said Monday that U.S. manufacturing firms "reduced workforce numbers

substantially" last month in response to a marked decline in sales and negative

sentiment towards the outlook for output over the coming year.

     "There are too many questions here, too many puzzles in this information

that need to be chased down and corroborated against additional information,"

Wilcox said. 

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

--MNI Washington Bureau; +1 202 371 2121; email: evan.ryser@marketnews.com

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