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Will Recent Job Gains Be Enough to Convince the Fed to Raise Rates in September?

job-marketApproximately 215,000 jobs were added in the United States in July, bringing the average monthly job growth for the last three months to 235,000 and the total number of jobs created in the last 12 months to 2.9 million, according to the July 2015 Employment Summary released by the Bureau of Labor Statistics on Friday.

The Federal Open Market Committee stated in its July meeting that more labor growth is needed before the Fed decides to raise the federal target funds rate. Will July's job gains drive the Fed to increase rates in September after years of keeping them near zero?

"This was a strong enough report to increase the odds that the Fed will move in September to officially increase its federal funds target rate, which impacts short term interest rates," Realtor.com Chief Economist Jonathan Smoke said. "Indeed, the mortgage market has already risen this year, although recently rates have trended back on mixed economic data signals this summer.  Today’s report will likely lead to an increase in 10-year bond yields and mortgage rates and we expect that the 30-year fixed conforming rate could end the year as much as 40 basis points higher than at current levels."

Also of note, job gains for May and June were revised upward for a combined total of 14,000 more jobs than were originally reported, according to the BLS. Smoke said the job growth in the last year, which has been consistently strong in the last nine months, has been a key reason for stronger housing demand this year.

The average workweek inched up in July by 0.1 hours up to 34.6 hours and the average hourly earnings increased by 5 cents up to $24.99, which may not be the wage growth economists were looking for, but Fannie Mae Chief Economist Doug Duncan said Friday's BLS Employment Summary for July offered the further improvement in the labor market the Fed was looking for before hiking the federal funds target rate.

"The average workweek ticked up, and average hourly earnings rose during the month to a trend-like 2.1 percent from a year ago," Duncan said. "Following last week’s report of a similar year-over-year gain in the Employment Cost Index, it is difficult to argue that wage gains are firming. However, we don’t see any piece of news in today’s jobs report that presents a hurdle for the September lift-off, a call we have held since last year. Recent FOMC member commentary suggests that the strength of this jobs report would have to be offset by a broad-based decline in economic data, including the remaining month's employment data, in order for them not to invoke the first rate hike in 9 years at their September meeting."

While job gains have been solid for the most part for several months, one economist does not think it will be enough to convince the Fed to raise rates next month. Potential homebuyers stand to benefit if the Fed does not raise rates, however.

"This jobs report is being closely watched by the Federal Reserve as one of the last two job reports before their September meeting," Trulia Chief Economist Selma Hepp said. "The Fed is looking to see 'some improvement in the labor market' and today’s figures will probably cause them to postpone raising interest rates in September, which is good news for home buyers who are hoping to purchase a home before mortgage rates go up."

Smoke added, "As the market focuses its attention on higher rates, which will negatively impact affordability, we’re nonetheless likely to see an increase in demand for homes in the slower fall and winter months because more jobs and higher wages will have more of an effect on housing in the short- to medium-term. Moreover, even with an increase, rates remain at incredibly low levels from a historical perspective."

Economists are also carefully monitoring employment among the much-talked about "millennial" demographic, which many have pointed to as a key driver of growth in the housing market for the next few years.

"Employment rate among young adults, 18-34 years old, continues to grow on an upward trajectory, albeit slower," Hepp said. "This decisive age group of would-be homebuyers is being closely watched as improvements in their employment and wage growth will have an indispensable impact on the housing market."

Also in the July Employment Summary, the civilian labor force participation rate remained unchanged from June to July at a 38-year low of 62.6 percent after dropping by 0.3 percentage points from May to June. July's employment-population ratio was also unchanged at 59.3 percent and has shown very little movement in the last year, according to the BLS. The number of people 16 and over who are not in the labor force in July was a record-high 93.7 million, up almost 2 million from July 2014.

The unemployment rate most commonly reported, the U3 rate, declined by held steady from June to July at 5.3 percent. The more comprehensive U6 unemployment rate, which counts both people without work seeking full-time employment and those workers "marginally attached to the labor force and those working part-time for economic reasons," dropped 0.1 percentage points month over month down to 10.4 percent from June to July and is down from 12.2 percent in July 2014. The U6 unemployment rate has not been below 10 percent since May 2008, when it was reported at 9.7 percent. It peaked at 17.1 percent in April 2010.

About Author: Brian Honea

Brian Honea's writing and editing career spans nearly two decades across many forms of media. He served as sports editor for two suburban newspaper chains in the DFW area and has freelanced for such publications as the Yahoo! Contributor Network, Dallas Home Improvement magazine, and the Dallas Morning News. He has written four non-fiction sports books, the latest of which, The Life of Coach Chuck Curtis, was published by the TCU Press in December 2014. A lifelong Texan, Brian received his master's degree from Amberton University in Garland.

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