2015 has so far very much been the year the Federal Reserve could liftoff and be the first major Central Bank to raise interest rates.
The US jobs market has grown rapidly, with monthly jobs created above pre 2008 crisis levels and still rising. Throughout the months of September and October, markets saw a slowdown in jobs created, however Novembers numbers beat all estimates with 271,000 jobs created and upward revisions on previous months figures. The US unemployment rate has dropped to 7 year low at 5% and markets saw an uptick in average hourly earnings.
After the latest release of economic data, estimates for a December rate jumped. In October, the chance of a December hike was around 20% – 30%, now analysts and markets are estimating a 70% chance of a rate hike from the Federal Reserve in December and 73% in January, as shown in the Fed Funds Futures.
The jobs market is strong, unemployment is low and with average earnings is picking up, meaning core inflation in the US should start to rise as well.
However the Federal Reserve still has concerns that could lead them to not hike in December and keep rates lower for longer.
The main problem being the strength of the US Dollar across all currencies except those that are pegged. This is along with the low prices of oil is dampening inflation in the US, making inflation virtually non-existent.
At the current pace of the US economy inflation will pick up, even with the strong dollar. The dollar can get stronger, especially with the ECB across the pond potentially expanding their current QE program, which the markets expect to find out the verdict from Mario Draghi in December also. So it’s vital the Federal Reserve are prepared to hike before inflation has the chance to spiral out of control.
The hiking cycle
There are 2 rates at which the Fed could hike rates, fast and aggressive or slower and longer. At the current rate, the factors for and against a hike require two different cycles of interest rate hikes.
The current jobs market and strong NFP numbers could require an aggressive rate hiking cycle. On the opposite side, the strength of the dollar and low levels of inflation requires smaller rate rises as so not to suppress inflation and increase the strength of the US Dollar further.
What the Fed mustn’t do, hike too soon before the economy is ready, forcing them to cut rates soon after having an immediate negative impact on the economy. Janet Yellen has always been on the “lower for longer” side of interest rates. The US economy is ready for a rate hike, however it’s asking a lot of the Fed to hike before the Christmas holidays, meaning if December isn’t the month for liftoff, January is almost certain if the economy carries on improving at the current pace.
If the Fed don’t hike in December, 2015 will be known as the year the Fed talked about raising interest rates, and didn’t.
The next Fed meeting is on the 16th December
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