interest-rate-hike

The on-again-off-again issue of a last-minute rate hike by the Fed was given new visibility by the recent robust jobs report released last Friday 1. Even before the report, Federal Reserve Chairwoman Janet Yellen made several comments that indicated the possibility of a hike was still on the table for the December 15–16 committee meeting.

According to the ongoing Fed mantra, the key is getting economic data that supports an indication the growth is “sufficient to generate further improvements in the labor market and to return inflation to our 2% target over the medium term.”

Did That Shoe Drop?

While until last Friday many analysts felt the Fed might have been continuing to support a December myth of an impending rate hike, that view may have changed. The jobs numbers released showed employers added 217,000 jobs in October, much higher than the expected 180,000. This is a dramatic reverse from the past two month’s reports. (With the latest revisions, August and September had averaged only 145,000 additions, seen as an indication of a stalled recovery.)

Charles Evans of the Chicago Fed Bank, reinforced the comments of Chairwoman Yellen by adding, “Strong wage growth would be a very helpful component to my outlook, and I think also pushing inflation up to 2%, which is what we need.” However, even with this news he countered with the need for caution, noting, “It’s only one number.”

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Positioning the Price of Gold

If there is, indeed, a rate hike, the earlier predictions of Goldman Sachs, which was in the minority, will prove to be prescient. The market had resisted believing that the news would be good enough for a long-delayed raise until March. However, the rate-sensitive price of gold reacted to the renewed speculation of an earlier increase by dropping 1 percent, to $1,152. This 10-week low left many wondering whether they would find coal or new toys under the tree based on year-end trading.

Of course, the intense focus now is on positioning trades and holdings based on the final decision in the mid-December committee meeting. The mixed signals continue, and the ongoing uncertainty will ensure a great deal of debate and study over the next few weeks concerning Federal Reserve policies. Specifically, the spokesman for the central bank indicated continued micro-monitoring of all economic and financial trends and developments both here and globally. At the same time there was a signal of less concern over those trends abroad impacting the progress of the U.S. economy.

Once again, traders and analysts are updating their analysis of the ultimate impact of even a modest hike if it does come in this calendar year. Raising the rate will mean companies pay more for their working capital, and that generally lowers earnings and securities prices. Likewise, falling security prices are normally a boost for gold prices. Added to this speculation is increasing expectation of at least a moderate correction in securities prices, another positive factor for gold.

Additional Sources:

1. http://www.wsj.com/articles/strong-jobs-report-strengthens-case-for-december-fed-liftoff-1446817637