Bond Market News

December Fed Rate Hike? Strong Jobs Data

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A Reuters report is suggesting that the robust report on U.S. employment released last week has strengthened the conviction of economists who have been forecasting a December interest rate increase from the Federal Reserve, according to a Reuters poll published on Tuesday.

The survey of over 80 leading economists found a 70 percent median chance the U.S. central bank would raise its short-term lending rate at its final meeting of the year, next month.

That marks an increase from the 55 percent forecast in an October poll, after volatility in global markets and fears of a slowing labor market had lowered expectations of a near-term Federal Reserve rate hike.

“The economic risk of them raising too soon still outweighs the risk of them lifting off late. However, they seem to believe the time has come and recent data seems to offer support for a December action,” said Russell Price, senior economist at Ameriprise Financial.

Fed policymakers, led by Chair Janet Yellen, have put the case for a December rate hike firmly on the table since the October policy meeting. Reuters polls have been consistently predicting a December rate rise since the Fed opted not to move in September.

After pricing out the likelihood of any move this year, financial markets have turned tail and are now giving a 68 percent probability of a rate hike next month, almost bang in line with the Reuters poll.

The central bank downplayed global financial turmoil at its October meeting and said the U.S. labor market was still healing as it pointed explicitly to the possibility of a rate increase at its next gathering in December.

Prospects for a tightening in monetary policy were further raised on Friday when the Labor Department said 271,000 non-farm jobs were added to the U.S. economy last month, the most in almost a year, and more than any of 101 economists polled by Reuters had expected.

The report also showed the unemployment rate hit a 7-1/2 year low of 5.0 percent, a level many Fed officials see as consistent with full employment, with wages picking up steam.

In a snap Reuters poll of Wall Street bond dealers conducted after Friday’s jobs data, 80 percent of economists said they were convinced or very convinced the Fed would hike rates before the end of the year, with just one-fifth saying they were not convinced. [FED/R]

“The Fed was very close to raising short-term interest rates in September, but concerns about possible downside risks from the rest of the world led it to delay. Those downside risks appear to be a lot less worrisome now,” said Scott Brown, chief economist at Raymond James and Associates.

“The hawkish FOMC statement and Yellen’s comments suggest that the Fed will raise rates in December unless we get some bad economic data.”

The U.S. central bank has held benchmark overnight rates in a zero to 0.25 percent range since December 2008 to combat a deep recession brought on by the financial crisis and nurse the economy back to health.

The Fed has signaled that its likely rate hike path will be gradual, a view the poll found economists also hold.

The federal funds rate is expected to end the year in a 0.25 percent to 0.50 percent range, implying a quarter-point increase at the Fed’s Dec. 15-16 meeting, according to the poll. At the end of the first quarter of 2016, it is expected to be another quarter-point higher.

Both forecasts are unchanged from an October poll.

Economists forecast no increase in the second quarter of 2016 but a small boost in each of the next three, putting the mid-point of the range at 1.375 by the end of the first quarter of 2017.

But they were split evenly over whether a further strengthening of the dollar from expected rate hikes would be a problem for the economy.

Those surveyed saw little impact on the economy from the anticipated tightening in monetary policy. The growth estimate for the end of the year was at 2.7 percent and expected to dip slightly, to 2.5 percent, at the end of the first quarter of 2016. Both estimates are unchanged from a previous poll.

Other economic forecasts also remained little changed.
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