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Monday, November 2, 2015

US Fed rate hike chances dependent on US jobs data

The US policymakers had pivoted in their meeting earlier last week towards a December interest rate increase, largely due to the Fed's updated model of the US economy. 

Will Janet Yellen and the Fed raise rates in December?

The model assumes that the Federal Open Market Committee (FOMC) raises the benchmark rate in late 2015. However, immediate lift-off has "been a feature" of the model since late 2014, Barclays noted.

Fed spokesman, David Skidmore declined to comment. In the current model, "the long-run growth rate is two-tenths lower" at 2%, Barclays said. FOMC participants forecast the economy's long-run growth rate at 2% in September. 

An increase in the Fed rates would have an impact well beyond the US borders, increasing borrowing costs for dollar debtors in emerging markets, pushing up the greenback against some major currencies and driving a global reallocation of investment money. 

Many believe that the US jobs data due in the coming week may hold the key to whether the Fed will raise interest rates for the first time since 2006 in December, signalling its intention to end an era of almost free dollars. According to analysts polled by Reuters, the expectation is that the US employers outside the agricultural sector to have added 180,000 jobs in October and overall earnings to have increased by 0.2% during the month. Mickey Levy, an analyst at Berenberg in New Yor said, "If we get 175,000 or 180,000 (new jobs) and wages up three tenths of a per cent, that significantly increases the probability that the Fed will raise rates in December."

The state of the US labor market is not the only concern of the Fed, which made an explicit reference to "uncertainty abroad" when it decided to hold rates steady in September. Even though this reference disappeared in the October policy statement, lower growth in emerging markets including China and falling oil prices have taken a toll on US manufacturers. 

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