US employment figures showed better than expected results in August, but the Federal Reserve remains cautious about the future economic situation. Despite payrolls rising by 1.37 million and unemployment falling from 10.2% to 8.4%, Federal Reserve chairman Jerome Powell sees low interest rates persisting for some time to come.
“We think that the economy’s going to need low interest rates, which support economic activity, for an extended period of time. It will be measured in years,” Powell warned after the US jobs report was released on August 4. Bank of Singapore chief economist Mansoor Mohi-uddin sees the benchmark fed funds interest rate unchanged at 0.00-0.25% for up to the next five years.
Powell’s caginess is understandable. Despite the US job market being far below its peak unemployment rate of 14.7%, only 10.6 million jobs have been recovered over the summer in contrast to the 22.2 million lost in March and April. Worst, the pace of labour market recovery is gradually slowing down following rapid gains when the economy re-opened, allowing many workers to return to their jobs.
“With consumers still reluctant to spend amidst the pandemic and the uncertain economic outlook, companies are more cautious about re-hiring all the workers they were forced to lay-off during the lockdown,” observes Mohi-uddin. The rate at which the number of first time jobless benefit applications is reducing has slowed down sharply, with the total number of unemployed remaining very high at 13.25 million.
Mohi-uddin sees the Fed’s dovish outlook keeping US Treasury yields very low, supporting risks assets while weakening the US Dollar further. “The yield curve should steepen modestly as the US economy recovers over time and inflation expectations rise. But the overall level of yields is likely to stay very low,” he comments. He forecasts 10-year yields at 0.90% over the next year, pushing the greenback down to 1.25 against the Euro over the same period.
