Job numbers announced Friday were as expected and strong enough to ensure the Federal Reserve will raise rates next week. The total job gain was 211,000; that is on top of some upward revisions of the last few months—sufficient to meet the job creation goals set by the Fed. This doesn’t mean the Fed is now set on a course for much higher interest rates in the months to come. Thus far, there is still no signal from the traditional motivators for Fed action.
The Fed’s position has been noted over and over again: This has been a very unusual period of time for the central bank as it has been shoved into the role of solo economic motivator since the recession. Issues such as inflation and money supply have earned secondary status as the Fed has had to worry about the overall growth of the economy and the strength of employment numbers. The Fed has been far looser with its rate policy than it normally would have been, but it has been far from alone as other global central banks have been engaged in the same policies.
Now that it is almost a certainty that Fed rates will come up next week—by a miniscule quarter point—the pressing question is: What happens from here? Will rates keep coming up every time the Fed meets? Will the hike cause a reaction in the markets? Will the dollar value increase and further damage the U.S. export community?
It is unlikely the Fed is planning to embark on a strategy of frequent rate hikes. There is still no inflation for it to react to and no burning need to hike rates. The most likely strategy at this point is one of continued caution—a small rate hike followed by a wait-and-see attitude to determine if the country’s economy handles it well enough. But remember, this year’s Federal Open Market Committee had three doves from the regional banks and only one hawk—next year is just the opposite with members such as Esther George, James Bullard and Loretta Mester generally voting as hawks and only Eric Rosengren defined as generally dovish.
Markets should not be all that upset by this move—they have been expecting this for over a year. There will be a knee-jerk reaction at first. Investors that have been counting on cheap money will be forced to retreat, but few expect this to be a major disruption in the markets for any length of time.
The biggest worry will be over the value of the dollar. The strength of the U.S. currency has had nothing to do with efforts by the U.S. to bolster it and everything to do with weakness on the part of the other world currencies. This will be the first thing to really make the dollar stronger, and that will have a negative impact on the U.S. export community. The Fed will not hold rates down simply to boost exports, but it will be a consideration going forward.
- Chris Kuehl, Ph.D., NACM economist and co-founder of Armada Corporate Intelligence