Over the past few weeks, the likelihood of a December rate hike by the Federal Reserve Bank has grown substantially. Both economic data and hints from a number of Federal Reserve policymakers now point towards a December rate hike and now on Wall Street 70% of investors polled believe a rate hike in December is possible. So let us take a look at the data and what Fed officials are saying that is making investors believe a hike is coming.
Data
One of the most compelling data points is the October jobs number. Expected to come in at 185,000, but blew that figure out of the water when actually coming in at 271,000. The unemployment rate fell to 5%, from 5.1% and average hourly earnings rose 0.4% for the month. Furthermore, the increase in pay on a year-over-year basis was 2.5%, the highest increase the jobs market has seen since July 2009.
Furthermore, jobless claims over the past few weeks have also been low. Initial claims for the period November 1 - November 7 came in at 276,000, with the four week moving average hitting 267,750. These figures are both well below the 300,000 benchmark and are currently at levels not seen consistently since the 1970's.
The Fed has stated that its target unemployment rate is 5%, which we are at now, and based on unemployment claims, would appear we will stay in that area. The other key data point that the Federal Reserve wants to meet is an inflation number of 2%.
Well, recent data indicates that core inflation, which represents a basket of goods, excluding food and fuel costs, now sits at 1.9%, up from 1.6% at the start of the year. This is while the actual inflation rate still sits at 0.2%, but that includes fuel, food, and all other goods and services Americans purchase. With oil prices at multi-year lows, the core inflation rate is a better indicator of actual inflation since it removes the volatility of such commodity price moves.
Federal Reserve Members Rhetoric
It all started when Fed Chairman Janet Yellen made a speech back in October where she stated, "I anticipate that it will likely be appropriate to raise the target range for the federal funds rate sometime later this year and to continue boosting short-term rates at a gradual pace thereafter as the labor market improves further and inflation moves back to our 2% objective,".
Then a few days after the Fed didn’t raise rates at its October meeting, Janet Yellen sat in front on Congress and
But, other members of the Federal Reserve committee have also been signaling a move could soon come. William Dudley, New York Fed President, told reporters earlier in the month, "it is quite possible that the conditions the Committee has established to begin normalizing policy could soon be satisfied."
Boston Fed President Eric Rosengren has stated similar feelings about a rate hike this month. "All future Committee meetings -- including December's -- could be an appropriate time for raising rates, as long as the economy continues to improve as expected."
Fed President from Chicago Charles Evans, whom previously was against a rate increase, has also recently stated, "the precise timing for the first increase in the federal funds rate is less important to me than the path the funds rate will follow over the entire policy normalization process."
Market Reaction
In the past, the Fed had been concerned about how the market would react to a rate hike, thus using that as an excuse for not raising rates. But, with the majority of market participants believing a hike is coming in December, bond yields have moved higher and stocks fell for a few days, but have since recovered. Those movements tell a story that the markets are ready for a rate hike and will handle it with minimal pain.
While none of the economic data, anything that Janet Yellen or any of the other Fed Committee members have said ensures a rate hike is coming in December, investors should be ready if one does come down the pipes. Check back soon to find out what ETF's will benefit from a rate hike and which ones will be hurt by higher interest rates.
Matt Thalman
INO.com Contributor - ETFs
Follow me on Twitter @mthalman5513
Disclosure: This contributor held long positions in Apple, Tesla, Intel, Google, Amazon.com, Facebook, Priceline and Microsoft at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
Anyone who believes that unemployment is only 5% is living in fantasy-land.
The data is finally actually pointing toward the sanity of a TINY increase in interest rates. The Fed should proceed with caution, though, as the dollar remains strong, making the interest rate hike a further danger to American jobs and to the balance of payments mess. Employers are still taking jobs to China and other slave labor countries, and real wages are still decades behind the times, as is, of course, the minimum wage.