What’s Next for the FED?

During the last Federal open market committee meeting, the committee highlighted that they were on the verge of raising the interest rates for the first time in almost a decade, however also said that economic data over the next couple of weeks needs to continue to meet expectations.

It should also be remembered that the Federal Reserve Chairman, Janet Yellen, during her testimony before the congress, also mentioned the fact that raising rates in December is still on the table provided all economic data continues to fall in line with expectations. She was somewhat optimistic by saying that the US economy is growing moderately and that they expect to see further improvement before the end of the year.

This is clearly an indication that the Federal open market committee is data dependent and if the market continues to see strong economic data coming out as expected or better than expected, then we might see a hike in December. Keeping the December hopes alive, the Non-farm payroll data on Friday, which measures the strength of the labor market in the US economy in terms of number of jobs created every month, was reported at 271,000 jobs, beating market expectation of 180,000 jobs.

This means that the US economy added more jobs than expected and is the strongest figure so far in 2015. Markets got really excited with this figure as USD rallied across the board and commodity prices further dipped to the downside. Other economic news also indicated that the US labor market is now really strong: unemployment dropped to 5.0% from 5.1% which is full employment, average hourly earnings also increased to 0.4% but labor participation remains the same at 62.4%. With all this strong economic data, there is no doubt that the Federal Reserve has to raise the rates in the next committee meeting.

However, the inflation rate might be a factor to hinder the Federal Reserve from raising interest rates in the next Federal open market committee meeting in December. The inflation target by the Federal Reserve is pegged at 2%, but at the moment the inflation rate is at 0%. Furthermore, raising the interest rates at this time might have a more damaging effect on emerging markets especially at a time when China’s economy is on a slowdown. US dollar strength might lead to financial instability in the emerging market; this is similar to 1992-2001 when we saw a USD bull market cycle.

In conclusion, I think December is the time for the Federal Reserve to raise the rates, going by its proposition of being data dependent. Good economic data from November to December will further support a raising hike in the next meeting.