Why is the Fed Likely to Raise Interest Rates Next Month?

It looks like the improving job market is having a big impact on what the Fed is planning on doing with interest rates next month. But the latest report isn't the only thing helping with this decision.
 
According to Time Magazine, after a few lackluster months, payrolls and wages jumped in October. That's one less reason for them to leave interest rates near zero.
 
“Last Friday’s national jobs report triggered an instant recalculation of the odds of a December interest rate hike by the Federal Reserve,” notes USAA’s Wasif Latif. “Where it had been roughly 70-30 against an increase, now it’s about 70-30 in favor of one.”
 
However, it isn't just this one jobs report that's causing this change. The two main focuses of the Fed's mandate are the current state of employment and inflation.
 

Jobs

Thanks to the October surprise, which included a 2.5% year-over-year jump in hourly earnings, conventional wisdom has shifted.

The number of long-term unemployed – those without a job for 27 weeks or longer – has been declining dramatically since the recession and continues to make up a smaller percentage of the total unemployed. Yet there are still more long-term unemployed than there were eight years ago before the recession.
 
You see this dynamic across a number of jobs metrics. The so-called quits rate has stalled out, and still rests below pre-recession levels. (If more people leave their job, it shows that they think they can get a better one.) The same is true with the U-6 unemployment rate, a broader gauge of unemployed that includes those who are working part-time when they want full-time hours. The U-6 rate now rests at 9.8%, compared to 8.4% in October 2007. And a smaller percentage of those in their prime-working years (25 to 54) are in the workforce now.
 

Inflation

Core inflation – which strips out volatile food and energy movements – sits at 1.9% now, and has sat below the Fed’s 2% target since February 2013.
 
While hourly earnings jumped in October, after healthy showings in August and September, the rate of growth is still well below pre-recession levels. The economic cost index shows a similar trend. This metric – which looks at the cost of employee benefits in addition to wages – grew 2.1% in the third quarter of 2015. Despite a spike in the first three months of the year, the ECI hasn’t risen above 3% since the middle of 2008.
 

So, Why Raise Interest Rates Next Month?

It might just be time. According to Time Money, "the Fed may raise interest rates in December because it just feels weird keeping the rate at zero for so long, and the economy has recovered enough to support a slight uptick."

Read more from the original article on Time Money.

Posted on November 19, 2015 at 4:19 pm
Steve Harwood | Category: Home Buying

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