The May job report has rolled in and many analysts have been ecstatic about the news. Hiring was strong in May as companies expanded their pay rolls, lending hope that the recovery, now five years in, is finally picking up steam. The report also caps off the best four month hiring period since the booming late nineties. It’s fair to wonder, however, if a rate hike from the Fed may soon be around the corner.

Federal Reserve Fed FOMC Central Bank
Fed

Many officials within the Fed have wanted to increase the rate, staving off potential inflation and if done right, stabilizing growth. Fed Kansas City Chief Esther George has been pushing for a rate hike sooner, rather than later. Ms. George is known for being an inflation hawk and apparently fears that if the Fed doesn’t raise the rate soon, high inflation will become imminent.

While inflation hawks are calling for a rate hike in the near future, it seems likely that Fed Chair Janet Yellen will hold off on moving too quickly. While the recovery does appear to be picking up steam, the Fed will not move too quickly to raise interest rates. Doing so will make it more expensive to do business and will put pressure on mortgage and loan interest rates. These developments in turn would restrain economic growth.

Good news intensifying rate hike pressures

The unemployment rate held steady at 6.3% even though many analysts were projecting an increase this past month. The economy added a solid 217,000 jobs in May and although the unemployment rate did not improve, it is at its lowest levels since before the Great Recession in 2008. Health care and social assistance linked jobs led the way, adding 39,000 jobs. Employment in construction and manufacturing increased by 6,000 and 10,000 respectively.

At the same time, labor force participation is actually at its highest levels since the late 1970’s, having reached 62.8 percent. Payrolls have exceeded their highest point in 2008, though unemployment remains higher as the population itself has grown. Wages also grew by 2.1% to reach $24.38. While this increase just barely beats out inflation, most analysts are taking it as a good sign as wages have been stalling out as of late.

Not all of the news is good, however, as Americans remain pessimistic about the housing market, according to a recent survey. According to the survey released by the MacArthur Foundation, an astounding 70 percent of Americans have a negative outlook on housing. This will likely suppress prices through the near future. Meanwhile, the share of long-term unemployed Americans remains high at 34.6 percent, well above historical norms.

Quantitative Easing likely to come to an end soon

Besides a potential rate hike, the Fed will also likely keep going forward with its quantitative easing program. With the Q.E. program, the Fed created billions of dollars of new money and purchased assets, most often U.S. treasury bonds. This injected money into the money supply, increasing liquidity and providing the American government with funding.

With the American economy showing stability and strong growth, however, the quantitative easing program may no longer be needed. The program has weakened the value of the dollar vs other currencies and could contribute to any potential inflation.

With the end of the quantitative easing program markets will be denied access to cheap dollars. This could decrease liquidity and will also increase the value of the dollar. The most dramatic effects, however, likely won’t be felt within the United States but instead in those emerging markets that have become dependent on access to cheap dollars.