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".

But bond king Jeff Gundlach of DoubleLine Capital isn't so sure, said BusinessInsider.com. 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."

Recommended

US inflation is rising – but it’s not enough to rattle markets yet
Inflation

US inflation is rising – but it’s not enough to rattle markets yet

The latest US inflation figures showed that consumer prices are rising more rapidly than expected. But markets shrugged. John Stepek asks why, and wha…
14 Apr 2021
Why all eyes will be on US inflation data this week
Inflation

Why all eyes will be on US inflation data this week

As the world comes out of lockdown and demand for goods and services rises, attention will shift to inflation and what it means for interest rates. Th…
12 Apr 2021
What will Joe Biden’s “build back better” plan mean for markets?
US Economy

What will Joe Biden’s “build back better” plan mean for markets?

Joe Biden recently proposed a $2trn “build back better” stimulus plan for America – on top of the $1.9trn he announced earlier this year. Saloni Sarda…
6 Apr 2021
What does Joe Biden’s $3trn infrastructure plan mean for your money?
US Economy

What does Joe Biden’s $3trn infrastructure plan mean for your money?

Joe Biden is set to announce a further $3trn of public stimulus in the US. Saloni Sardana looks at what’s on the table, and what effect it could have …
30 Mar 2021

Most Popular

The bitcoin bubble will burst: here’s how to play it
Bitcoin

The bitcoin bubble will burst: here’s how to play it

The cryptocurrency’s price has soared far beyond its fundamentals, says Matthew Partridge. Here, he looks at how to short bitcoin.
12 Apr 2021
Properties for sale for around £400,000
Houses for sale

Properties for sale for around £400,000

From a converted church in Banffshire with views towards the Cairngorms National Park, to a period property in the Georgian market town of Beverley, e…
2 Apr 2021
US inflation is rising – but it’s not enough to rattle markets yet
Inflation

US inflation is rising – but it’s not enough to rattle markets yet

The latest US inflation figures showed that consumer prices are rising more rapidly than expected. But markets shrugged. John Stepek asks why, and wha…
14 Apr 2021