A report (Friday) that employment growth in the United States slowed in July triggered a brief mid-day rally on Wall Street as the investment community assumed that the Federal Reserve, for the first time in two years, will not raise interest rates.
The U.S. economy created 113,000 jobs in July, not the 142,000 that many forecasters expected. The unemployment rate increased to four point eight percent from four point six percent. That indication of a slow down in the rate of growth is interpreted as good news since it alleviates pressure on the central bank to keep raising interest rates to fight inflation. Inflationary pressures are less pronounced in a slowing economy as companies have a harder time raising prices.
Carlos Gutierriez, the U.S. commerce secretary and former chief executive of Kellogg Company, says a slow down in growth balances the economy.
"You'll recall that in the first quarter (of the year) we had 5.6 percent economic growth," he noted. "Unsustainable. Very high. I think it made a lot of people wonder. It made many people become concerned about whether the economy was heating up. That [growth] has slowed down to 2.5 percent [in the second quarter]. What you have [now] is a pretty good average for the year."
The Federal Reserve, the U.S. central bank, will decide on August 8 what to do about short-term interest rates. It has raised rates .25 percent for 17 consecutive meetings going back to June 2004. That cumulative four and a quarter percent rise translates into higher payments on adjustable rate debt and has a depressing impact on economic activity.
The expectation now is that the Fed is likely to not raise rates next Tuesday. As a result, financial markets have rallied with the major U.S. stock market indices moving sharply higher, despite concerns about the situation in the Middle East. Oil prices Friday retreated slightly but still remain above $75 per barrel.