Modest Economic Growth and Job Gains Point to Fed Rate Hike

December 3, 2015Monetary Policyby EW News Desk Team

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The Federal Reserve ventures closer to raising interest rates in a move that could impact the cost of mortgages, car loans, corporate bonds, and a variety of other debts throughout the financial world.  According to the Federal Reserve, "economic activity increased at a modest pace in most regions of the country” from October to November, indicating that the Fed sees enough data points to justify raising interest rates.

In a speech on Wednesday afternoon, Fed Chairwoman Janet Yellen said she “look[s] forward” to an interest rate hike, as it will demonstrate that the economy has recovered from the Global Financial Crisis of 2008-2009.

"When the Committee begins to normalize the stance of policy, doing so will be a testament ... to how far our economy has come," she said.  This hints at strong job gains that have continued throughout the last eight years from the historic lows set in 2009, when job losses, net worth losses among middle class Americans, and bankruptcies worsened at their highest level and at their fastest pace since the Great Depression.

Consumer Spending Signals Mixed

Yellen also demonstrated an upbeat outlook on consumer spending, calling it “particularly solid,” although she did not refer to a particular indicator.  Despite Yellen’s optimism, personal consumption expenditure increases have sharply decelerated throughout 2015, and grew only 0.1% in September and October.  At the same time, the Bureau of Economic Analysis sees higher wage gains that could point to rising inflation in 2016, which would embolden the Federal Reserve to increase interest rates.

Job Gains Embolden Fed

In addition to wage gains, job growth seems to improve even as consumption, GDP growth, and manufacturing activity remain low. According to independent payroll company ADP, private sector employment rose by 217,000 jobs in November from the prior month—far above expectations. The BEA has also reported strong gains throughout the labor market in terms of total jobs.

Some analysts believe this trend will result in full employment in 2016, which will likely embolden the Federal Reserve to raise rates further. "Job growth remains strong and steady. The current pace of job creation is twice that needed to absorb growth in the working age population,” said Mark Zandi, Chief Economist at Moody’s Analytics. "The economy is fast approaching full employment and will be there no later than next summer."

Janet Yellen acknowledged that job growth remains strong, but also said on Wednesday that the labor market was still “healing” and was not fully recovered. However, risks to job growth from the rising dollar, weak demand abroad, and weak PCE were not concerns for the Fed Chairwoman, who also noted that risks from abroad have mostly vanished after becoming chief concerns earlier in 2015.