With the dawn of the second quarter, we look back on the first and wonder if the Federal Reserve will deliver a similar performance on the matter of interest rates.
In the first quarter, there were two FOMC meetings and two 25-basis-point rate hikes. There are two scheduled FOMC meetings in the second quarter. In the first quarter, employment continued to hum along, arguably in stronger doses than the Fed expected. The trend was but one among many, although it played no trivial role in convincing the newly minted Fed chairman to lead the central bank into two more rounds of tightening, or so one could argue.
Indeed, weekly initial claims for jobless benefits posted a sharp drop in the first quarter, falling by 45% through the week ended March 25 from the close of 2005, according to numbers from the Labor Department, as the graph below illustrates. Currently, initial jobless claims are running near the lows of the last two years.

The strength is supported by the uptick in nonfarm employment growth. In the first two months of 2006, the nonfarm labor force grew by an average of 207,000 a month, or well above the monthly average of 173,000 that’s prevailed since the start of 2004.
And while average hourly earnings of production workers slipped a bit in January and February from the torrid monthly pace set last October at 0.9%, this metric remains in the upper range of the last several years, posting a 0.5% gain in February.
No wonder that the national unemployment rate has been running under 5.0% for three straight months through February–the longest consecutive monthly run below-5% since 2001.
Is the Fed paying attention to the momentum on the labor front? Absolutely. And the market knows it. Fed funds futures for May are priced in anticipation of another 25-basis-point hike to 5.0%. But nothing lasts forever, and so there’s a bit more doubt as to whether the June FOMC will also deliver another rate rise, as the June Fed funds futures contract suggest.
But a lot can happen between now and June, and for the moment there’s the question of whether the employment picture will continuing strengthening for the next batch of numbers. On that score, it’s not hard to find dismal scientists forecasting growth. “The labor market data continue to indicate strong job growth,” Dean Maki, chief U.S. economist at Barclays Capital in New York, tells Bloomberg News. “We expect the economy to grow more strongly in the near term.”
In fact, the consensus forecast for this Thursday’s release of the March employment report calls for a holding pattern on the 4.8% jobless rate, according to the Street.com.
In short, expect more of the same, short of some statistical shock elsewhere in the economy, such as a large negative surprise for the latest weekly jobless claims data scheduled for release on Wednesday.