The Federal Reserve, tasked with the dual mandate of price stability and maximum employment, is increasingly looking ready to raise rates. With NFPs coming in at 271,000 versus an expected 177,000, the headline unemployment rate and the U6 rate (which includes discouraged and marginally attached workers) both decreasing, and hourly wages up 2.5% over the last year, the case has never been stronger for the Fed to raise rates. This goes along perfectly with the narrative that they have laid out over the past year of remaining data dependent and trying to act by December.
However, while Fed Fund futures may be pricing in a nearly 70% chance of a rate hike in December, perhaps the optimism is somewhat misplaced. There are two key metrics that have yet to fall within the Fed’s desired range and will likely drive discussions in the coming meetings: labor force participation rate and inflation. The labor force participation rate has failed to decline significantly over the past year and thus may signal continuing labor market slack. Similarly, inflation is still much below the 2% target set by the Fed. Raising rates too early could actually potentially diminish the Fed’s credibility – it has long maintained that they are looking for an inflation rate of 2% and acting early may convey an adverse signal to the market that the 2% target is a ceiling rather than target level.
Thus, the upcoming meeting will definitely be an important one to watch and the Fed’s actions will likely define the future trajectory of the US economy