Odds Of December Rate Hike Reach Near Certainty

 

With a stronger economy supporting job creation, and a new presidential administration promising tax cuts and big spending on infrastructure, the Federal Reserve is seriously signaling its intention to raise interest rates in the near future.

In her testimony before Congress’s Joint Economic Committee, Fed Chair Janet Yellen said that a rate hike “could well become appropriate relatively soon if incoming data provide some further evidence of continued progress toward the committee’s objectives,” according to Bloomberg.

In addition, St. Louis Federal Reserve President James Bullard recently said that he was also leaning toward a rate hike, according to CNBC. The news source indicated that rates are likely to rise by 25 basis points.

“The Federal Reserve is seriously signaling its intention to raise interest rates.”

While Yellen made no remarks regarding the recent election of President-elect Donald Trump, some Fed observers have taken the results as a reason to be more bullish about a rate hike. While it is not yet clear what Trump will ultimately be able to get through the Republican-controlled Congress, his plans may lead to more growth and higher levels of inflation.

Jonathan Wright, a former Fed economist and an economics professor at Johns Hopkins University in Baltimore, told Bloomberg that a rate hike in December “is a done deal, barring a significant surprise in the next jobs numbers or in financial markets.”

“But the pace of firming is likely to continue to be glacial because the funds rate will then be within about a percentage point of the FOMC’s estimate of neutral,” he added.

Bloomberg also reported that bond prices have fallen and stocks have risen following Trump’s election.

The unemployment rate recorded at the beginning of December added additional weight to the possibility of a rate hike – though policymakers are not without questions. The headline unemployment rate fell to 4.6 percent, and Reuters reported that some Fed officials believe higher inflation will soon follow if a rate hike is not taken.

However, the news source notes that at least some of the drop in unemployment is due to individuals leaving the labor force, rather than job gains. This is in part the result of an aging population that is fueling a steady increase in retirements. In addition, hourly wages fell slightly in the most recent report. Due to these factors, it’s possible that the economy could withstand more job growth without reaching an inflationary spiral in the coming year. This uncertainty will likely play a role in how rapidly interest rates rise.

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