Boston Fed Chief: Rate Hikes Hinge on Whether Low Job Growth Was 'Anomaly'

How quickly the Federal Reserve raises interest rates depends partly on whether last week's dismal report on jobs growth was an 'anomaly,'  Boston Federal Reserve President Eric Rosengren said Monday. He still expects enough growth to justify gradual hikes. 

"The economic data have been choppy," Rosengren, a voting member of the Fed's monetary policy committee, conceded in a speech in Helsinki, Finland. But "given that the labor market contrasts with the pattern in the first quarter, and the pick-up in spending observed so far from other data, it will be important to see whether the weakness in this report is an anomaly or reflects a broader slowing in labor markets."

Institutional economists and traders asked the same question Friday, after the report from the Bureau of Labor Statistics showed only 38,000 positions were added in May, far short of the 155,000 that economists predicted in a Dow Jones survey.

The odds of a June rate hike fell to 4%, down from 20% at the start of the week, as traders bet that the report would prompt the central bank's monetary policy committee to pull back from previous indications that it might act this month.

A rate increase in June would be only the second since the Fed cut rates to nearly zero to bolster the economy during the financial crisis of 2008. After the first 25 basis-point boost in December, the central bank had indicated it might raise rates as many as four times this year but quickly halved the projection amid market swings in January and February related to slowing growth in China and plummeting oil prices.

An increase sooner rather than later would benefit finance companies from JPMorgan Chase (JPM) to Bank of America (BAC) , whose interest income was eroded by seven years of near-zero rates. Typically, banks are able to buoy that revenue stream by passing on rate increases more quickly to borrowers than to depositors.

Despite the poor labor-market growth in May, Rosengren noted that the unemployment rate fell to 4.7%, which is "my estimate of full employment," and that higher energy prices and a weakening dollar are reversing some of the causes of low inflation in January. Indeed, 4.7% is the lowest unemployment rate since November 2007 and less than half of the 10% peak after the financial crisis.

Additionally, core inflation during the past year has reached 1.6%, Rosengren said, higher than in 2015 and closer to the Fed's goal for stable economic growth.

Interest rate increases since the crisis have been slow "because of economic conditions characterized by a very gradual return to full employment and to the Federal Reserve's 2% inflation target," Rosengren said, and "I expect the normalization process will continue to be gradual, compared with previous episodes of U.S. interest-rate tightening.

See full coverage on the Fed's upcoming interest-rate decisions.

More from Investing

Biotech's Coming Back to Life: Cramer's 'Off the Charts'

Biotech's Coming Back to Life: Cramer's 'Off the Charts'

Papa John's: The Noise and the Stock Price

Papa John's: The Noise and the Stock Price

CSX Rises on Earnings, Revenue Beat

CSX Rises on Earnings, Revenue Beat

United Beats Second Quarter Earnings Estimates

United Beats Second Quarter Earnings Estimates

Video: Here's How Goldman Sachs May Change Under David Solomon

Video: Here's How Goldman Sachs May Change Under David Solomon