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Fed decision may hinge on which holds sway: Data or outlook

The Federal Reserve's decision on whether to raise interest rates this month is coming down to a simple question: Are policy makers data-dependent or outlook-dependent?

The Federal Reserve's decision on whether to raise interest rates this month is coming down to a simple question: Are policy makers data-dependent or outlook-dependent?

The flow of economic statistics from the government and elsewhere in the run-up to the Fed's Sept. 16-17 meeting, punctuated by Friday's labor report, mostly suggests that the first rate increase in nine years would be justified. Automobile sales have been strong, the housing market is buoyant, and joblessness has fallen to a level that most policy makers reckon is equivalent to full employment, though inflation remains below the Fed's target.

The outlook is murkier, clouded by turmoil in financial markets, a rising dollar and a shaky global economy, thanks especially to China. That argues for caution in ending an unprecedented era of near-zero interest rates.

A drop in manufacturing employment last month raises questions about whether events overseas are starting to weigh more on the U.S. economy, said Paul Mortimer-Lee, chief economist for North America at BNP Paribas in New York.

"The Fed won't be sure, and they'll want to know: Are these weaker payrolls the start of a trend, will it build, or will it come back again?" he said. "If you're not sure, as a central banker, you do nothing, you wait and see."

Employers added 173,000 workers in August and the U.S. jobless rate dropped to 5.1 percent, the lowest since April 2008. The gain in payrolls, while less than forecast, followed advances in June and July that were stronger than previously reported, Labor Department data showed Friday. Average hourly earnings climbed more than forecast and workers put in a longer workweek.

"You can't look at the labor market anymore to justify delay," said Neil Dutta, head of U.S. economics at Renaissance Macro Research in New York. "The labor market is giving a green light. The only way they can justify not going is based on inflation or the global economy and the risk of the global economy to the U.S. The data is saying, 'Go.' The markets are saying, 'No.' "

Most Fed policy makers calculated in June that a jobless rate of 5 percent to 5.2 percent was the equivalent of full employment, according to projections released after that month's meeting of the policy-setting Federal Open Market Committee. Officials will come up with new estimates at this month's gathering and some private economists are predicting they could be lowered then.

Richmond Fed President Jeffrey Lacker, who has been more inclined toward tighter policy than most of his colleagues, said after delivering a speech Friday that the labor data represented a "good report." He said in the speech that it is time for the Fed to end its era of zero interest rates.