Two weeks ago, the Fed announced that decided to keep interest rates unchanged at its November meeting. Since then, a lot has changed. We have a new President-elect, and a slew of new economic reports have been released. Given these changes, how likely is it that the Fed will actually raise rates next month? Let’s find out.
Now that the latest jobs data has been reported, I think it’s safe to say that the Fed will raise key interest rates at its upcoming Federal Open Market Committee (FOMC) meeting in mid-December. As I’ve mentioned before, Janet Yellen is a labor economist, so factors like payroll and wage growth have a huge impact on her policy decisions. In recent months, we’ve seen more robust wage growth, as well as positive revisions to payroll growth.
I’m also convinced that the December FOMC meeting will be the time to raise rates, because it will be just before the holidays. This is typically a cheery time of year on Wall Street, so investors will be less likely to react strongly to the rate hike.
The Fed also needs to restore the health of the banking system. When I was in Europe the other week, I saw firsthand that the low negative interest rates are destroying German and Italian banks. The Fed doesn’t want this type of problem here at home. So, the Fed will likely raise rates next month to shore up our banking system.
That said, I don’t expect more than a 0.25% increase to rates, just as the Fed did last December. After that, I expect the FOMC will imply that more key interest rates may be forthcoming. But, as always, take these projections with a grain of salt. The Fed remains “data dependent” and will need to see continuing improvement in the U.S. economy for it to keep raising rates next year.
In any event, I’ll be sure to update you on the Fed’s latest policies in this daily blog.