Brace yourself for a US rate rise

With the Federal Reserve pondering whether to raise interest rates next week, Friday’s US job data seemed to seal the deal. Non-farm payrolls grew by a healthy 211,000 in November. At the same time, September and October’s figures were revised up by a total 35,000. This means nearly 500,000 people were hired in the last two months alone. Markets now imply an 85% chance of a rate hike to 0.5% at the next meeting.

What the commentators said

“Consider it a done deal,” said The New York Times’s Nelson Schwartz. By suggesting that the economy “is growing steadily and creating jobs at a healthy pace”, the payroll data “remove the last major uncertainty before the Fed decision”. At the same time, Fed chief Janet Yellen has repeatedly said “that a rate increase was imminent unless the economic data went wildly awry”. What’s more, this could be the first raise of many, with experts suggesting rates could be as high as 1% by next autumn.

There are four good reasons not to raise rates, said Martin Wolf in the FT. Firstly, “there is no sign of significant inflationary pressure”. Secondly, “if the Fed were pursuing a symmetrical policy, inflation should be above 2% as much as below”. There is also “a real risk that the tightening will have a bigger negative effect on the economy than expected, particularly if it is seen as the first of many moves”. Finally, while “unemployment is low, so is the participation rate”.

On the contrary – “the world economy is strong enough to withstand tighter US policy”, said Andrew Kenningham of Capital Economics. Not only would a move “end the uncertainty” over when the “lift-off” will occur, it would also “be seen as a vote of confidence in both the US and the global economies”. In any case, “provided the accompanying rhetoric is dovish, which we think it will be, investors should be reassured that any future rate rises will be gradual”.

But bond king Jeff Gundlach of DoubleLine Capital isn’t so sure, said The junk bond and leveraged loan markets are both “particularly troubling”. It’s “a little bit disconcerting that we’re talking about raising interest rates with corporate credit tanking”, said Gundlach. As for the many young money managers who have yet to live through a rate-hike cycle – Gundlach warns: “It’s a different world.”

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