Brace yourself for a US rate rise

An American rate rise looks to be imminent following the release of healthy US jobs data.

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

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".

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

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."

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri