December Rate Hike Baked-In

The Federal Open Market Committee will almost surely hike rates again by year-end unless something off-the-wall happens to keep policy on hold. While the Bureau of Labor Statistics noted the net effect of the hurricanes was to reduce employment, there was “no discernible effect on the national unemployment rate.”

Strength in recent data had already injected significant risk into a December rate hike, and hence the drop in the jobless rate to 4.2%, a 16-year low, will be duly noted by the Fed, especially the hawks. The climb in earnings is what many Fed officials have been wanting to see as well to help dig out of the low-inflation situation, so the 0.5% September jump, the upward revision in August and the 2.9% year-over-year pace back to the December cycle high make the case for a Dec. 13 tightening. The Fed is expecting three hikes next year, with risk of more, rather than fewer moves, especially if the tax cuts and other stimulus measures take place. Additionally, the choice of a potential new Fed chair, and other additional Board members likely added, will be crucial for the rate outlook.