US Labor Market Tightens, Central Bank Braces for June Rate Hike

US Labor Market Tightens, Central Bank Braces for June Rate Hike

Unemployment rate fell to 5.5% in February 2015 as employers increase job offers.  This is good news for the American workforce, but the Federal Reserve says it is bracing for a possible increase in interest rates in June to prevent the economy from overheating.


The recent drop in unemployment eases Fed worries over negative shifts in the US economy due to global downturns and falling oil prices. As the outlook for increased interest rates continues, stocks and short-term bonds experienced setbacks. The likely Fed rate hike prompted investors to sell bonds and stocks, such that the benchmark U.S. 10-year yield reached its biggest one-day rise since November 2003.

Employment gains have since been above 200,000 for the past 12 months, the longest stretch since 1994. Consequently, the US dollar hit an 11-1/2-year high versus the Euro because of the recent European Central Bank bond-buying campaign to lower euro zone borrowing costs.

Economists had been conservative with their outlook saying that February employment would peg at 240,000 and unemployment rate at 5.6%. Nevertheless, last month’s data show employment reaching 295,000 and unemployment rate at 5.5%. Employment in January 2015 was 239,000.bizbizFed officials are closely monitoring market indicators to validate an interest rate increase. Meanwhile, economists reveal speculations that continued tightening of the labor market could force the Fed to pull the trigger and raise borrowing costs.

Economists say there is still a substantial slack in the labor market despite the recent employment hike. Some 2.4 million Americans, who are doing part-time jobs, are actively pursuing fulltime positions but could not find one. This gap, economists explain, means that the American job market has so much room for improvement.

When interest rates increase, it becomes relatively more expensive to borrow money. Investors will then have to tamper ambitious pursuits and re-strategize. A June rate hike puts pressure on businesses, particularly those that are bound for expansion this year. Expansion requires additional investment, and with the recent pay increases, employers will have to rethink about borrowing money and to be more prudent in the way they spend it.

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