Monday, October 12, 2015

Fed to hike rates in spite of September dip in labour market – Commerzbank

FXStreet (Delhi) – Research Team at Commerzbank, suggest that the job growth of only 142,000 in September was clearly disappointing but we still expect the Fed to take the first step in December and then increase rates further at a relatively modest pace, initially of 25 basis points per quarter before stepping up the pace when it sees much higher inflation risks.

Key Quotes

“Consequently, job growth should slow in the months ahead, but the unemployment rate will fall a bit further nevertheless. According to estimates by the Bureau of Labor Statistics (BLS), only about 70,000 people per month will enter the US labour market over the next five years. This means that even moderate job growth of 100,000, for example, will reduce unemployment further, which should gradually raise wage pressure.”

“All in all, more moderate job growth will still be enough to reduce the unemployment rate further. As it virtually shows full employment already, at 5.1%2, inflation risks should gradually increase.”

“Consequently, the market view that key interest rates will rise by much less than FOMC members’ projections suggest is a risky one in our opinion. This applies even if market participations were right in the past with their expectation that the Fed would reduce its interest rate projections over time.”

“However, past weeks have shown the following: First, the Fed appears to hold back with rate hikes when the data are disappointing. Second, the strength of the labour market is feeding through to inflation relatively slowly. We have therefore pushed forward the point at which the Fed starts to raise rates at every meeting far into the future – from mid-2016 to mid-2017.”
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