Points to a Stronger Economy
A little less than a month before the Federal Reserve Open Markets Committee has its next policy meeting, Fed Chair Janet Yellen says a rate hike could come “relatively soon.”
Her comments were backed by stronger economic data. Housing, jobless claims, and inflation were all signalling that U.S. growth is picking up, which is why markets overwhelmingly expect the Fed to raise interest rates in December.
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The CME FedWatch tool puts the odds of a December rate hike at 90.6%, up significantly from the 75% level it hovered at during October. Most of the optimism comes from an improvement in underlying conditions, but some of it also due to the economic plans of President-Elect Trump.
Trump’s proposals for infrastructure spending and tax cuts have buoyed the stock market, even sending the Dow Jones to new all-time highs. (Source: “Fed Rate Rise Could Come ‘Relatively Soon’ as Data Point to Stronger Economy,” The Wall Street Journal, November 17, 2016.)
That being said, the Federal Reserve’s crucial metric is inflation. When the price growth nears two percent, they see it as a sign that the Fed should pull back on stimulating the economy. This would imply raising interest rates and ceasing any bond purchase programs that they installed.
“The economy has made further progress this year,” Yellen said on Thursday before Congress’s Joint Economic Committee.
When asked if the election of Donald Trump had impacted the Fed’s perception of the economy, Yellen replied, “…To my mind, the evidence we’ve seen since that time remains consistent with the judgment the [Fed’s policy] committee reached in November.” (Source: “Yellen affirms interest rate hike likely next month,” Los Angeles Times, November 17, 2016.)
Data on the real estate market was particularly promising, with U.S. housing starts and permits for new construction rising by 25.5% and 0.3%, respectively. Since builders wouldn’t undertake construction if there was no demand, analysts think the data reflects a real need for home-buying.
These improvements in the real estate market are widely considered to be a leading indicator of the economy.
And then there were the unemployment claims, which fell again last week to lows last seen in November 1973. There haven’t been fewer than 2 million people on unemployment rolls since 2000, suggesting that the labor market is tightening.
After all, the headline unemployment rate fell to 4.9%, and the broader measure also ticked down to 9.5%. So, even though Yellen cautioned that political uncertainty could persist “for some considerable time,” she seemed upbeat about the possibility of a December rate hike.
