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Just a few weeks ago, markets were betting that the Federal Reserve would decide on a September interest rate hike. Then a market crash in China, turmoil in emerging markets and an all-around volatile U.S. stock market complicated things. Is a September interest rate hike still likely?
On Friday, the Labor Department released its employment report, which is a key factor in determining the monetary policy decisions of the Federal Reserve.
At the last Federal Reserve meeting in July, the Fed stated that it wanted to see “some further improvement” in labor market data. This month continued the trend of a declining unemployment rate. The U.S. unemployment rate dipped to lowest point since 2008.
Source: The New York Times
The U.S. unemployment rate is currently 5.1%, according to the August 2015 report. The long-term goal of the Federal Reserve is between 5% and 5.2%.
The report also stated that employers added 173,000 new jobs in August, which was lower than economist predictions of 220,000. However, this low number is being attributed to the lower participation rate among small businesses. There was a 10% decline in the number of businesses that responded to the survey, which fluctuates seasonally.
In addition to new job creation, the Federal Reserve also wants to see growing wages in the report. Average hourly wages beat expectations by rising 0.3% in August – another good sign for a rate hike.
While the individual numbers of the report are generally promising, it is important to understand that the most important part is that they are following a trend. The labor market has been steadily improving, indicating that the time to rise rates is near.
If it hadn’t been for the market turmoil of the past few weeks, I would say that the September rate hike looks even more likely, but there are now more factors to take into consideration. The International Monetary Fund warned this week to all economies to be weary of increasing interest rates. On Tuesday, the European Central Bank voted to hold its low interest rate.
The interest rate hike is most likely happening this year. But it is a flip of the coin if it will happen in September or at the Fed’s last meeting of 2015 in December.
What Will Happen When the Fed Raises Rates?
Are you still wondering why Wall Street is so obsessed with predicting when interest rates will rise? The answer: world markets are still hooked on cheap money.
The ultra-cheap money from low interest rates maintained by the Fed has been feeding a long bull market until the past few weeks.
We have witnessed volatile markets recently, making it even more difficult to predict the actions of the Fed. There is the fear that when interest rates rise, growth will slow down. There is one thing I am certain about: this volatility isn’t over yet. If and when interest rates rise, expect markets to react dramatically.
The labor market data is likely to make markets swing as they process the news. However, in the long term, rising interest rates indicates a healthy economy, and it is good for the dollar to see interest rates rise.
When rates do rise, it is important to bear in mind that the initial rate increase will be small – likely around a quarter of a percentage point.
The Federal Reserve’s next policy meeting is scheduled for Sept. 16 and 17.
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