The 5 Most Convincing Arguments for a Fed Interest Rate Hike in December

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U.S. Federal Reserve Chairwoman Janet Yellen has strongly indicated to Congress that, barring any major shocks to the global economy, the Fed policymakers are likely to vote for an interest rate hike very soon.

On Dec. 2, Yellen said the U.S. economy has “recovered substantially since the Great Recession” and that she was “looking forward” to increasing rates.

Then on Dec. 3, Yellen continued to boost morale. “I currently judge that U.S. economic growth is likely to be sufficient over the next year or two to result in further improvement in the labor market,” she said. “Ongoing gains in the labor market, coupled with my judgment that longer-term inflation expectations remain reasonably well anchored, serve to bolster my confidence in a return of inflation to 2%.”

Of course, the problem with these comments from Yellen is that she’s being intentionally vague on timing and rationale.

Other experts make clearer justifications for a December rate hike.

Here’s what they are saying…

These Experts Provide Greater Perspective on the Interest Rate Hike

  1. Jeffrey M. Lacker, a member of the Federal Open Market Committee, told The Wall Street Journal on Oct. 1 of a December rate hike: “I don’t see why not. We will have another labor market report. Presumably that will move us further toward labor market improvement.” Lacker was referencing the October jobs report, which stated that the economy had added 271,000 jobs that month. The latest nonfarm payroll report, released on Dec. 4, stated that the U.S. economy added 211,000 jobs in November, which was slightly better than expected. Both reports are good indicators of an interest rate hike.
  2. Legendary PIMCO co-founder Bill Gross told Bloomberg Radio‘s Tom Keene and Michael McKee on Nov. 6 what investors should be doing to prepare for an all but certain December rate hike…
  3. “[The Fed is] ready to go. So what I would be doing is to pursue risk-off types of trades, meaning don’t invest in stocks to a significant extent and don’t invest in high-yield bonds.” (This is because bonds decline in value after interest rate hikes.)

  4. At the Federal Reserve Bank of Kansas City’s annual economic symposium on Aug. 29, 2015, Fed Vice Chair Stanley Fischer said, “Given the apparent stability of inflation expectations, there is good reason to believe that inflation will move higher as the forces holding down inflation dissipate further.” While inflation is currently at an anemic 0.2%, according to the U.S. Bureau of Labor and Statistics, it’s much better than the deflation we had been seeing earlier this year when prices for goods actually declined by -0.1% in January.
  5. Former Fed Chairman Ben Bernanke argued for a cautious approach to raising fed interest rates. He spoke to Yahoo! Finance on Oct. 23:
  6. “If we were to get another recession, then we would be in trouble. So there’s a case there for being cautious… You don’t want to have to raise rates and then have to come right back down to zero in a situation where the economy is weak and you don’t have the tools,” Bernanke said. His cautionary sentiment echoes Yellen’s, who remarked in her testimony to Congress on Dec. 3: “We want to make sure that, having achieved this progress in the labor market, we maintain it and don’t put it in danger.”

  7. Paul Ashworth, chief U.S. economist at Capital Economics said, “The cumulative improvement in the economy over the past few years means that it is almost impossible to justify interest rates still being at near-zero,” reported CNBC on Sept. 9.

He continued: “Regardless of the exact timing of the first rate hike, we anticipate that rising wage growth and core inflation will force the Fed to raise rates much more aggressively next year than the markets currently expect.”

Like Ashworth, many economists have cast opinions on next year’s outlook. Renaissance Macro’s chief U.S. economist told CNBC on Nov. 20 that he thinks the Fed is going to raise rates at least three times next year, if not four. This has several market economists pressing investors to worry more about their longer-term investment goals – i.e., retirement.

Keep apprised of all the news about a Fed interest rate hike by following us on Twitter @moneymorning and liking us on Facebook.

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