El-Erian: Jobs Report Means Fed Will Pay Greater Attention to Global Markets

Sep 4 2015 | 1:24pm ET

By Jonathan Spicer and Jason Lange (Reuters) - The latest U.S. jobs report was not definitively good or bad enough to help the Federal Reserve decide whether to raise interest rates later this month, leaving the decision hanging on volatility in financial markets over the next couple of weeks.

The economy added 173,000 jobs in August, quite a bit fewer than expected. But employment growth in June and July were revised higher, wage gains last month were better than expected, and the unemployment rate fell to a seven-year low of 5.1 percent.

With global stock and currency markets reeling over the last two weeks, the report is probably the best and last direct reading on the economy as Fed officials weigh whether to hike rates at a much-anticipated meeting on Sept. 16-17.

But the report disappointed those looking for clarity.

"With this jobs report ... the Fed finds itself in a real uncertainty jam when it comes to a September interest rate hike," Mohamed El-Erian, chief economic adviser at Allianz, in Newport Beach, California, said in an email.

"In the run-up to its policy meeting, the Fed will pay even greater attention to global market developments."

Since fears of a Chinese economic slowdown set off a global stock selloff last month, financial markets have become the primary signal for U.S. central bankers looking to tighten monetary policy for the first time since 2006.

According to Fed policymakers gathered in Jackson Hole, Wyoming last week, not only would the August jobs report need to be decent but market gyrations would need to dissipate for them to act, despite sustained strength in both the labor market and the broader economy.

The Fed is concerned not so much with employment but with the possibility that inflation, which has remained below a 2.0-percent target for a few years, will not rebound any time soon given the downward pressure that China could put on commodity prices and global growth.

U.S. stocks on Friday gained steam after the report was published, then headed lower alongside bond prices. Oil prices also fell.

For many, the report simply reinforced their previous views on the timing of the pending rate hike.

"I'd call this a good ... employment report. It didn't change the picture for monetary policy," Richmond Fed President Jeffrey Lacker, who favors a prompt policy tightening, told a retailer conference in Richmond, Virginia.

Others highlighted the fact that the economy produced nearly 50,000 fewer jobs than expected in August. Still, average job growth in the last three months is 221,000, seen as enough to keep healing the labor market.

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