Tags: Surge | US | Hiring | Scary

Why a Surge in US Hiring Could be Scary

Sunday, 02 June 2013 03:03 PM

If U.S. employers really ramped up hiring over the last month, that would be extremely good news, right? Maybe not.

The U.S. Federal Reserve has pulled out all the stops in a five-year campaign to nurse the economy back to health, slashing interest rates and buying so many government bonds it now holds roughly 15 percent of Washington's publicly held debt.

The potential problem is that the central bank is such a dominant player in the U.S. bond market that even a tiny shift toward tighter money could trigger a spike in interest rates that could set back the economic recovery.

Indeed, the Fed has been setting the tone for the U.S. debt market for so long that the central bank has corralled much of Wall Street into bets that interest rates will stay low.

If the U.S. jobs report due on Friday shows an outsized gain in employment during May, some analysts fear bond investors will react by bidding interest rates sharply higher in anticipation that the Fed will soon end its massive bond-buying program.

"Whenever you turn off the lights, everyone is going to be running for the door at the same time," Richard Gilhooly, an interest rate strategist at TD Securities in New York, said.

Already, yields on 10-year U.S. government debt have spiked over the last week to their highest levels in a year.

The jump in yields took off after the last jobs report showed an acceleration in hiring over the last six months and as a growing number of U.S. central bankers - including Fed Chairman Ben Bernanke - suggested the Fed could begin tapering its bond-buying program soon.

Some investors are worried because last month, for example, the Fed bought $45 billion in Treasury securities. That was the equivalent of more than a third of the Treasuries issued by the federal government that month.

Economists polled by Reuters expect that employers added 160,000 jobs in May. A number well above that might cement expectations the Fed will soon trim bond purchases, which could send interest rates sharply higher, Gilhooly said.


If the Fed is ready to dial back its support for the economy, it would follow as a matter of course that the Fed would like interest rates to rise a little. Low interest rates are a sign of economic stagnation, while higher rates would point to economic vigor.

But sharply higher rates run the risk of choking off credit to businesses and families. Also, if five years of super-low interest rates have channeled too much money into some asset classes, a sharp reversal in the flow of capital could pop these bubbles and result in big headaches for the economy.

Citing these concerns, the Organization for Economic Cooperation and Development warned last week that a 2 percentage point increase in rates on long-term U.S. government debt could subtract at least 1.5 points from U.S. economic growth over one year.

While the U.S. economy has been strengthening, most economists expect it will expand only a lackluster 2 percent this year, meaning that a sharp rise in rates could deal a painful setback.

The pain could extend to Europe, a top U.S. trading partner that has been depending on exports to turn around its own weak economy. The European Central Bank's governing council meets on Thursday and is expected to hold its refinancing rate steady at 0.5 percent, according to a Reuters poll.

Of course, not everyone is convinced the recent run-up in U.S. interest rates - even if rates were to accelerate if there is a strong jobs number on Friday - would be a bad thing for the economy.

Fears that the bond market is getting ahead of itself by pushing up rates might be part of the normal transition from an economy dependent on central bank support to one that is healthy enough to stand on its own, said Evariste Lefeuvre, an economist at Natixis in New York.

Lefeuvre argues that the apparent resilience of the U.S. economy to growing government austerity is a sign that interest rates actually should be rising. A big gain in employment during May would just be a sign that investors have been right to anticipate the Fed will soon start easing its foot off the gas pedal.

"It would just be good news," Lefeuvre said. "And the trend of rising interest rates would continue."

© 2018 Thomson/Reuters. All rights reserved.

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If U.S. employers really ramped up hiring over the last month, that would be extremely good news, right? Maybe not.
Sunday, 02 June 2013 03:03 PM
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