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Will There Be a December Rate Hike?

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After the U.S. Federal Reserve left interest rates unchanged Wednesday, investors are asking, “Will there be a December rate hike?”

The fact that the Fed did not raise interest rates at the October meeting was not a surprise. But the Fed’s shift in attitude was unexpected. The U.S. central bank struck a hawkish tone on the economy, saying it “has been expanding at a moderate pace” despite slowing monthly job gains.

Fed officials pointed to “solid rates” of growth in consumer spending and business investment. They also removed a warning from their previous statement that said a global economic slowdown could sap U.S. economic strength.

The Fed also made it clear a December rate hike is still possible.

Federal Reserve
Odds of a December hike increased to 43% as of Thursday morning, up from 38% before the Fed’s statement, according to the CME Group’s FedWatch program.

While a December rate hike is on the table, the Federal Reserve is adamant that it will continue to monitor the health of the economy before raising rates.

Now these economic numbers are in focus for those asking, “Will there be a December rate hike?”

Will There Be a December Rate Hike? Check These Figures

 The U.S. Labor Department reported Thursday that the number of Americans filing new applications for unemployment benefits increased by 1,000 to a seasonally adjusted 260,000 for the week ended Oct. 24. That leaves the four-week average at its lowest since late 1973.

It was also the 34th consecutive week that claims were below the 300,000 threshold, which is normally associated with a healthy jobs market.

But not every number is so encouraging…

The first read on Q3 GDP growth showed a sharp slowdown.

The U.S. Commerce Department reported Thursday that gross domestic product increased at just a 1.5% annual rate after expanding at a 3.9% clip in Q2. Economists had anticipated economic growth of 1.6% in Q3.

The U.S. economy has struggled to sustain a faster pace of growth since the end of the 2007-2009 Great Recession. Since then, average yearly growth has failed to break out above 2.5%.

Fed Chairwoman Janet Yellen has said throughout 2015 that a rate hike would likely be needed this year to keep the economy from eventually overheating. While the economy shows some signs of improving, it’s not close to overheating.

And the fact that other global banks are engaging in easing measures is only confusing matters. Last week, the People’s Bank of China cut interest rates for the sixth time in less than a year. The European Central Bank hinted at additional easing measures. And further stimulus moves from the Bank of Japan are expected as early as Friday.

On CNBC yesterday, Money Morning Chief Investment Strategist Keith Fitz-Gerald said a December rate hike is a good bet. But not for the reason you may expect…

“I think the game here now is the Fed is looking at a labor market that’s not as tight as they think, and they’re looking declining earnings this season,” Fitz-Gerald said. “I think they’re wanting to lower rates in 2016 so they’ve got to get ahead of that and raise them now.”

The Bottom Line: For those asking, “Will there be a December rate hike?” the answer is that a December rate hike is looking more likely. If the economic numbers continue to look impressive, we may well see a hike before 2016. According to Fitz-Gerald, the Fed may raise rates just so that they can lower them again in 2016.

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