The Federal Reserve’s FOMC minutes from November, published last week, indicate that the odds of a tick higher in rates before year-end have increased, despite the 8 to 2 vote that left rates unchanged at the last meeting. In the minutes, separate from the vote, it was revealed there was consensus on the notion that a good case can be made to move on rates sooner rather than later. There was in fact a degree of stridency in the opinions of those dissenting from the majority vote (Kansas City Fed President Esther George and Cleveland Fed’s Loretta Mester) that spoke to the need for preserving the Federal Reserve’s credibility by moving on rates—particularly given that the benchmarks that have been used to keep rates unchanged for nearly twelve months have effectively been met.
As we all know, both employment and inflation targets have been well-telegraphed guide posts for the Fed’s approach to tightening. In both cases, there have been significant strides made in recent months that should allow for the Fed to finally move on rates by year-end. In the case of employment, the official unemployment rate fell back to 4.9% in October from September’s 5.0%. By most measures, the current unemployment rate speaks to near full-employment. Additionally, within the October employment report released on November 3rd, there were signs of accelerating labor market strength.
Non-farm Payrolls (month-to-month) from the previous month were raised from an initial reading of +156k to +191k. Average Hourly Earnings (month-to-month) reflected a gain of 0.4% versus the prior month’s initial reading of 0.2%, raised to 0.3%. Private Payrolls posted a solid gain of 142k, though short of consensus expectations of 170k. Not unexpectedly, the participation rate remained steady at 62.8%. Other than the manufacturing sector, all other employment verticals posted jobs gains in the period.
In short, from an employment standpoint, the Federal Reserve no longer has a reason not to raise.
In the case of inflation, there are some long-sought-after signs of inflation. In the period, there were wage gains above consensus and a year-over-year gain in wages of 2.4% — again, above Fed target. There are other anecdotal indications that the economy is performing well.
October existing home sales rose 2.0%, well above consensus and at their fastest rate since the financial crisis. In addition to faster sales, prices also rose both on a month-to-month basis and on a year-over-year basis. New single-family home sales slipped in the period, but considering that on the year they have risen a staggering 17.8%, October’s modest slip is largely considered immaterial.
Initial weekly jobless claims have remained below 300k for 90 consecutive weeks, the longest streak since 1970. Even the highly volatile monthly durable goods data came in stronger than expected in October. Orders jumped by 4.8%. The consensus had been calling for a more modest gain of 1.5%.
If an argument is to be made that the Fed should stand pat on rates, it will be buttressed by leading indicators that speak to in-channel and modest expectations for growth in the 1.6% range. That said, there are few that think that the time hasn’t come for the FOMC to move 25 bps on rates. Markets are not only pricing in rates in December. Investors would welcome it.