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Down but not out, Fed can still press ahead after dismal jobs data

WASHINGTON (Reuters) - If June was ever on the Federal Reserve’s agenda to implement its second rate hike in a decade, Friday’s job numbers firmly sank that option and encouraged doves like Governor Lael Brainard to call for another delay in tightening.

Snow rests on the eagle statue atop the U.S. Federal Reserve in Washington January 26, 2016. REUTERS/Jonathan Ernst

The U.S. economy added just 38,000 jobs in May, around a quarter the number forecast, ending a positive series of data that had showed consumers were spending and growth was returning after a poor first quarter.

Brainard termed Friday’s report “sobering” and said that with the rest of the world hovering around a recession the United States “cannot take the resilience of our recovery for granted.”

That leaves it all up to Fed Chair Janet Yellen on Monday to make the case for keeping a rate rise in July alive, even if she agrees with Brainard that low global growth has capped how far and how fast the Fed can move.

Wall Street’s top banks unanimously expect the Fed will leave interest rates unchanged this month, though most see a quarter-point rate hike by the end of September, a Reuters poll on Friday showed.

While the Fed was already seen as unlikely to move on rates in June due to political concerns over Britain’s European Union vote, Friday’s data on its own won’t necessarily take a July hike off the table as policymakers look for other evidence of whether the economy is weakening, or merely following a trajectory they largely expect.

Fed officials since late last year have said job growth was bound to slow, and while the payroll gain in May was far below expectations it was influenced by one-time factors such as a telecommunications strike and a drop in construction that may have been linked to bad weather last month.

Meanwhile a jump in wages, a drop in the unemployment rate, and a decline in labor force participation are consistent with what policymakers have said they expect as the labor market tightens.

“For the Fed, it seems safe to say that a June hike is off the table. For now we are sticking with our July call but recognize the likelihood has gone down quite a bit and that we’ll need to see a sharp turnaround in the activity data for that to play out,” J.P. Morgan economist Michael Feroli said in a report after the jobs data.

The most recent forecast from Fed officials projected the unemployment rate to dip to 4.7 percent by the end of the year, the level it reached last month.

All told the data “suggests that labor market slack continues to fall,” said Mohamed el-Erian, chief economic adviser at Allianz.

There were also some potential quirks in the data, which can be revised heavily in subsequent months. Job declines in the oil and mining industries continued but the report’s weakness was amplified by unexpected losses in areas such as construction and falling numbers of temp workers.

The 15,000 decline in construction jobs “is likely to be an anomaly,” said Russell Price, senior economist at Ameriprise Financial Services Inc., in Troy, Michigan.

LONG-TERM TRENDS AT WORK IN LABOR FORCE DECLINE

The fall in the unemployment rate was partly the product of a decline in the size of the labor force, which fell by 458,000 workers between April and May.

That was largely the result of workers over 55 years of age and those without a high school diploma dropping out of the workforce, a development that coincided with the downturn in oil and gas industry jobs and manufacturing more broadly.

Fed officials had been expecting the labor force participation rate to resume its longstanding and demographically driven decline, a trend considered beyond the scope of monetary policy to address.

Traders now see about even odds of a Fed rate hike in September. Before the jobs report they had seen a July rate hike as likely.

Reporting by Howard Schneider and Ann Saphir; Additional reporting by Herb Lash and Jennifer Ablan in New York; Editing by Andrea Ricci

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