The odds of a Fed interest rate hike in December dramatically increased over the weekend.
One of the biggest reasons why was a strong October jobs report. The U.S. Labor Department reported Friday that non-farm payrolls rose 271,000 last month. The unemployment rate dipped to 5% from 5.1% and now sits at a level considered “full employment.”
Wage growth, which has been a key concern for U.S. central bank policy makers, rose 2.5% annually in October. That marked the best year-over-year performance since July 2009. And economists say the unemployment rate could head lower still.
The median view among U.S. Federal Reserve policymakers is that an unemployment rate below 4.9% would eventually send inflation above their 2% target.
Fed officials have reiterated for months that they would start lifting their benchmark rate when they saw real and sustainable improvement in the labor market. Interest rates have remained near zero since late 2008.
That’s exactly what they got with Friday’s October jobs report.
Earlier in the week, Fed Chairwoman Janet Yellen also gave her most convincing pronouncement yet that a Fed interest rate hike for December is definitely on the table.
At a hearing Wednesday before the House Financial Services Committee, a more hawkish-sounding Yellen said the economy was “performing well,” adding that a Fed interest rate hike in December is “a live possibility.”
Fed fund futures, used by investors and traders to place wagers on central bank policies, show a 70% likelihood of a Fed hike at its Dec. 15-16 meeting, according to CME Group. That’s up from 58% the day before the October jobs report and 38% before the Fed’s interest rate statement last month.
The majority of Fed policymakers also support a gradual pace of interest rate increases…
Why a Fed Interest Rate in December Is Likely
“We’ve indicated that conditions look like they could be right for an increase,” Chicago Federal Reserve Bank President Charles Evans said Friday on CNBC. “The real side of the economy is looking a lot better.”
St. Louis Fed Chief James Bullard said at an event in St. Louis last week that, “We are doing about as good as we could ever do.” He added that his economic models suggested the jobless rate was poised to drop to as low as 4%.
A number of economists tweaked their Fed interest rate forecasts after Friday’s jobs report.
Barclays moved its prediction for the first U.S. interest rate hike in nearly a decade to December from March. The firm cited a more hawkish Fed and October’s solid jobs report as reasons for changing its call.
Goldman Sachs, meanwhile, which back in June called for a December liftoff, has now shifted its talks to the timing of a second rate hike. The investment banks now pegs March for interest rate boost No. 2.
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Related Articles:
- Bloomberg: Trades Now See 70% Chance of Fed Rate Increase in December
- USA Today: Blockbuster Jobs Report Raises Odd of Fed Hike in December
- Business Insider: The Market Has Spoken: The Fed Will Raise Rates in December
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