An interest rate increase at next week’s Federal Reserve meeting would seem to be a foregone conclusion. The Fed would look downright foolish if it didn’t raise rates. But can we take anything for granted when it comes to the Fed making rate decisions?
On the surface, you would have to guess that there is almost no chance the Fed will leave rates alone at next week’s meeting. Indeed, that’s what the bond market and the federal fund's futures market are saying.
The three-month Treasury bill is currently trading at 0.50%. That’s nearly triple the 0.17% it was trading at on September 20, which was also its lowest point this year. It’s also more than double the high end of the Fed’s current fed funds range of 0% to 0.25%. Given that comparison, the Fed would look seriously out of touch with reality if it didn’t raise rates at least 25 basis points this time around. If anything, the Fed is now playing catch-up, not leading the markets. In any event, rates are going up regardless of what the Fed does or doesn’t do.
As if it needed more reasons to raise, the Fed has a strengthening economy to validate a rate hike. As we know, third quarter GDP was revised upward to annual growth of 3.2%, up from the initial estimate of 2.9% and the strongest pace in two years. The Institute for Supply Management’s two purchasing managers’ indexes both showed strong increases in November: the non-manufacturing gauge rose nearly three points to 57.2, it's the highest reading in 13 months, while the manufacturing index rose more than a point to 53.2. Likewise, factory orders for October jumped 2.7% while durable goods orders climbed 4.8%, the fastest pace in a year.
Last Friday’s November jobs report wasn’t great, but not terrible either. Non-farm payrolls rose a better-than-expected 178,000, although that was somewhat offset by a downward revision in the prior month’s gain by 19,000 to 142,000. The unemployment rate fell to 4.6%, a nine-year low, but that was mainly due to more people leaving the workforce. Also on the bad side, average hourly earnings fell 0.1%, the first down reading this year.
On the consumer side, personal spending rose 0.3% in October while personal incomes rose twice that. Retail sales rose 0.8% after climbing an upwardly revised 1.0% in September, the strongest two-month stretch in at least two years. Consumer sentiment is high and rising.
So clearly, things are picking up. There’s more than enough here to justify a rate increase. While the recent performance of the economy hardly qualifies as “overheating,” which the Fed is so darn worried about, it certainly should fill the bill.
(Just as an aside, I can already hear the press starting to write articles about how Donald Trump inherited Obama’s “booming” economy).
Then we have the Fed’s own words. The minutes of the Fed’s November meeting, which took place before the election, said a rate increase was possible “relatively soon,” the exact words Janet Yellen used the previous week in her testimony before the Joint Economic Committee of Congress.
While we might give the Fed a pass for not doing anything at last month’s meeting because of the election, there’s certainly no reason why the Fed will hold rates unchanged again, unless it’s worried that the result of the recent Italian constitutional referendum will cause worldwide economic turmoil (I’m kidding, or at least I hope I am).
So that moves us into next year.
This time last year, you’ll remember, the Fed raised rates for the first time since the Great Recession, and led the markets to believe that it was about to embark on a series of regular, modest – i.e., 25 basis point – increases about once a quarter in 2016. As we know, that never happened. The Fed chose instead to come up with one excuse after another – weak U.S. economic growth, weak Chinese economic growth, Brexit, the U.S. election – to avoid acting. It now seems to have run out of excuses.
If I were the cynical type, I would note that this just happens to coincide with the ending of the Obama Administration. President-elect Trump will have no such friendly Fed to help him.
But he probably won’t need it.
If Trump and the Republican-controlled Congress are successful in pushing through their pro-growth, tax reform, deregulatory agenda quickly next year and that program bears fruit – as the stock market seems to believe it will – then the Fed will have to start raising rates regularly, if for no other reason than to stay in step and remain relevant.
Clearly, the age of zero percent interest rates is now over. It’s about time.
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INO.com Contributor - Fed & Interest Rates
Disclosure: 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.