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Rising Unemployment Dampens Likelihood Of Fed Interest Rate Hike

By John S. McClenahen Layoffs in manufacturing continued to moderate in April, but the overall U.S. unemployment rate unexpectedly rose to 6% from 5.7% in March. Economists generally had expected an increase in the jobless rate in April, but to 5.8%. Since its most recent low of 3.9% in October 2000, the U.S. jobless rate has risen 3.1 percentage points, and the number of unemployed people has increased by 3.1 million, notes the U.S. Labor Department's Bureau of Labor Statistics (BLS). The ranks of the unemployment swelled by 483,000 in April, and there are now 8.6 million workers in the U.S. without jobs. Manufacturing shed 19,000 jobs in April. The average factory workweek In April was unchanged at 41 hours, the BLS reports, but overtime edged up by one-tenth of an hour to 4.3 hours. In recent days, as employment, factory orders and other data have suggested the economy is growing less robustly than it did in the first three months of this year, economists have discounted the prospect of the Federal Open Market Committee (FOMC) raising the influential federal funds rate at its meeting on Tuesday, May 7. Indeed, economists have begun to suggest that FOMC Chairman Alan Greenspan and his colleagues probably will leave short-term interest rates unchanged at the meeting at the end of June as well. Because the Fed does not usually raise interest rates when unemployment is rising, the federal funds rate is unlikely to be increased from 1.75% at either the FOMC's May or June meetings. And depending on what else is happening in the U.S. economy, the FOMC might take a pass again at its next scheduled session on August 13. "The Fed is unlikely to tighten while the unemployment rate is rising, regardless of the strength of the [rest of the] economy," stresses Bruce Steinberg, chief economist at Merrill Lynch & Co., New York.

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