Comments due by Dec. 11, 2015
November's solid jobs report gave the Fed a final piece of evidence, clearing the way for a December rate hike, but now the question is how fast can it raise rates given weakness in some other economic data.The economy added 211,000 nonfarm payrolls in November, and the unemployment rate was unchanged at 5 percent. Wage growth was up 0.2 percent, as expected, and October jobs were revised up to 298,000.
"The Fed goes in December, but the path is shallow, and you couldn't ask for anything more," said John Canally, strategist and economist at LPL Financial. The next clues on the pace of hiking will come from the Fed itself, when it releases its interest rate forecasts with the rate news, following its meeting on Dec. 16.
"The 12-month average job gain after this report is 220,000. The Fed's number for what keeps the unemployment rate steady is in the low 100,000s. They have to get going, but they probably don't have to get going as fast as they thought in September. It's not as shallow as the market thought. It's somewhere in the middle," Canally said.
The Fed is forecasting a 1.4 percent Fed funds rate for 2016. "The path is still going to be gradual and low. Most people believe 3(in 2016). They get to 1 percent and stop," said John Briggs, head of strategy at RBS.
Treasury yields initially moved higher and stocks gained after the jobs report, but news that OPEC was leaving its pricing policy unchanged sent oil sharply lower. That temporarily dampened the stock market rally, and the dollar gave back some of its early gains, while the euro crept higher. Stocks were up more than 1 percent in late morning trading.
Markets have been pricing in roughly 75 percent odds that the Fed will hike rates on Dec. 16, but the real debate has been what happens after that. "There's nothing standing in their way," said Jim Caron, fixed income portfolio manager with Morgan Stanley Investment Management. "Aside from an unforeseen geopolitical event, there's nothing standing in their way."
Caron said the Fed will be slow to hike, and that's in part because inflation at about 1.3 percent, is still well below the Fed's 2 percent target. He expects two hikes in 2016, after the initial increase in December.
"I still think it's going to be a slow pace. The Fed needs to resist the temptation to hike too soon. We're still at core PCE of 1.3 percent," he said. "When you're below target inflation, I still think you need to be very, very slow. Let's let these inflation pressures build up. We still are probably going to be off to the races on a slow start, or slow pace of hikes."
Caron said the strength in job growth and the positive internals of the report would be a good sign for wage growth — an important element for higher inflation.
"We might be at that juncture right now of people coming back to the labor force, the average hourly earnings looking solid, and the participation rate is looking up," he said. "I hate to sound overly optimistic. You can't make too much of a trend out of this. If this gets extrapolated into the future, this is a very good sign. It's a healthy sign that the labor market is starting to get back on its right foot. If that's the case, I don't think it's going to be too long before wages follow, and that's what we need to see."
One concern for the Fed has been the strong dollar, which keeps inflation low by pressuring on commodities prices. It also hurts U.S. exports. While the jobs report showed strength in the domestic economy, the U.S. trade deficit, reported at the same time Friday, unexpectedly widened to $43.9 billion in October, as exports hit a three-year low.
Economists immediately moved to cut back GDP forecasts. Barclays said the trade deficit reduced its Q3 GDP tracking estimate to 1.8 percent, from 2 percent, and it trimmed fourth quarter growth by 0.1 percent to 2 percent.
Traders globally have been waging bets on Fed rate hikes by bidding up the dollar. At the same time, they have been shorting other currencies where other central banks are easing, particularly so the euro.
That long dollar, short euro trade went very badly for some investors Thursday, when the ECB surprised with a less aggressive than expected easing package. Markets reacted sharply — the dollar swooned, the euro jumped 3 percent and bond yields rose. The euro held most of those gains Friday.
"This (jobs report) is pretty muscular. This will keep the Fed on track for December 16 liftoff," said Ward McCarthy, chief financial economist at Jefferies.
14 comments:
I believe the increase in the job is stable. I feel that at such an increasing rate, a spike in interest doesn't seem necessary. Regardless of how the domestic job market is showing promise, the United States is still in a hole in terms of the trade deficit, which is at $43.9 billion. The power of the dollar has always been a strong point for Fed, which looks like it influences when counting on Fed interest hikes. I feel if the FED focuses on the domestic economy first, it can potentially help our exports and the ridiculous debt.
I believe that that an increase in interest rate would be great, especially for those who want to save. In addition, the job market has been on a slow increase which is promising for the economy. However, the real issue I see here is the $43.9 billion trade deficit that the United States is in. The United States is importing way more than it is exporting. I believe that if the government focuses on the current trade deficit, rather than interest rates, then the overall economy will benefit.
- Hernan Gallego
After reading this article, an increase in interest rate would be pretty beneficial for the people who want to save a couple of bucks. Another plus for the United States is how there has been an increase in the job market which is good for the economy as well. The $43.9 billion trade deficit on the United States is a big problem due to the fact that they import goods more then they export them, which plays a big role in money, they should stop worrying about interest rates and focus on exporting goods.
Increasing the interest rate would be helpful for people that are trying to save their money. The job market is slowly getting better which is decreasing out unemployment rate. There is a trade deficit of almost $44 billion dollars that the United States need to focus on. Our imports are far greater than what we are exporting out of the country. This affects our money and if we can decrease our imports and deficit, then the economy will be better off
Sabrina Ruggiero
This article talks about how an interest rate lift off is certain to happen. Higher interest rates are intended to slow down the economy and making things more difficult. The concern that the article talks about is the strong dollar which keeps inflation low that can hurt the US exports. As jobs show improvement, the US trade deficit. But also the strength in job growth can illustrate positive outcomes for wage growth, which includes higher inflation. Increasing interest can do some damage and maybe a decrease on imports can lead to a better economy.
- Marchelle Correa
I think that this whole argument of interest rates can be a total pain because no matter which way we go, it either hurts a group of people or it hurts the other. So personally I think that if as a whole (loosely said) America wants to save money, increase the interest rate on that, but if not, just keep it low and work in other areas of the economy. I think that interest rates can be the death of the economy if it's not manipulated correctly. So for the best of America, I hope that we find more and more ways to help the economy instead of fiddling with risky factors. The key is to keep inflation low as always and make sure people are spending. Try to reduce government spending in the process therefore in a very simplified version, cut from the deficit and find way to cut it even more. Overall the article touches on great things regarding the interest rates and possibilities but I think there has to be other way to manipulate the economy into doing better for the American people.
- Alberto Monges
I think the inflation hike must be at a slow pace, like Caron said. It would have a negative effect if they initially raised the rate from 1.3 to 2 all at once, instead of increasing gradually. The economy itself is slowly getting back on track , as well as the workforce so the Fed needs to be careful about rate hikes. Also it is concerning our exports are at a 43.9 Billion deficit and is a three year low. Our exports are being hurt by our strong dollar, and we need to find a way to fix that and this deficit, which an increase could maybe help. I think that the inflation rate could help the economy if done gradually, it simply cannot be done all at once.
-Morgan Ward
This article was very interesting and all of these blog posts have heightened my interest on the subject matter and controversial topics in the world of economics. I for one am in favor of an increase interest rate, I believe it would be great and would benefit people in saving their hard earned money. With the job market increasing at the snail like rate that it is at, it is a good sign for the economy. Some believe this is unnecessary due to the $43.9 Billion United States trade deficit. To benefit the economy overall though I believe focusing on the debt and helping our imports and exports.
-Michael McGuire
I think that increasing the interest rate could be good and bad for people depending on how you look at it. This article talks about how the interest rates are bound to go up. There is also a trade deficit that the United States needs to focus on to trying to lessen.
Savanah Catucci
The steady growth in the job rate is very good to see as we hope to get our economy back to what it used to be before the recession. I do not think there should be an interest rate spike right yet. More of a slow rate would be better for the economy as a whole. Especially with exports hitting a three year low in October. The economy is in a delicate place and I think we should be more careful with what we do. Focusing more on exporting goods would be a better idea.
- Justin Grossmann
Interests rates should increase but not on December 16. Rising interest rates will benefit consumers savings accounts and aid the trade deficit, but having interest rates increase on December 16 is abrupt. Interest rates should increase gradually. Interest rates have been held low since the market crash of 2008. Suddenly increasing the interest rate to two would be too hasty. The economy is doing well but it is still recovering. Increasing interest rates rapidly might impede the progress we have made over the past seven years. So I hope the "December 16 liftoff" does not occur
This article talks about if increasing interests rates would be a positive or negative change for people. I think depending on how you look at the matter, it could be both positive and a negative, but that's with every decision. There is always going to be pros and cons, especially in business and economics, there are always risks involved. With interest rates though, I don't think it should be an immediate spike in the increase but I do believe there should be a gradual incline.
-Eva Hart
This article can be left up to interpretation. One side would argue that increasing interest rates could be harmful and one side could argue that it would be beneficial. Every decision is going to have pros and cons, positives and negatives...but the answer is to do what's right for the majority of society. Interest rates have been held low since the recession around 2008 and I think its time to increase them, at least slightly
This week's article is a great example of showing to arguments to a problem. The debate is whether an increased rate will be positive or negative to the economy. Since the recession in the United States, interest rates have been notoriously low even in real terms. Raising them I think will be an incentive for people to invent in more government securities and have a larger propensity to save. I myself like to save money even though interest rates are practically nothing. Right now the trend is to consume all in the now and disregard saving for the future. This to mean seems a bit unstable because unexpected costs come around and it is important to have capital to cover that. Therefore I think raising interest rates by a small margin will entice more investing however can't be raised to a point where everyone stops consuming. There needs to be a balance of cash flow and saving.
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