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Record-Low Interest Rates in Rearview Mirror Following Today’s Jobs Report

Any lingering doubts of a Fed rate hike during the December meeting were swept away with the November jobs report from the Bureau of Labor Statistics. Nonfarm payrolls increased by 178,000 jobs last month, relatively in line with expectations. Meanwhile, the unemployment rate fell to 4.6 percent, the lowest level since 2007. The economy is showing the characteristics of a mid- to late-term recovery, while monetary policy remains at crisis levels. The trajectory of rate hikes should become a bigger issue in the coming months as the Federal Open Market Committee accelerates normalizing policy to catch up with market conditions.

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For investors and homebuyers, the Fed meeting will have very little impact. The capital markets priced the interest rate increase immediately following the election, nearly mirroring last year’s timing. However, interest rates could continue to climb, albeit at a more modest pace than the kneejerk reaction following November’s surprising Presidential election. The capital markets may effectively set monetary policy as they assume a steeper trajectory to rate hikes, making a non-raise meeting more noteworthy than one where rates are increased.

The speculation surrounding Fed meetings should dissipate in the coming months as the FOMC finds little impetus to forgo normalizing interest rates. The equity markets have recently hit all-time highs; employment has expanded for 74 consecutive months; unemployment is low; wage growth is burgeoning; and GDP expanded in the third quarter at the strongest pace in over two years. The window of record-low interest rates has likely closed for this cycle, though rates remain extremely low by historical measures. In 2017, the Fed will likely lift rates up to four times.

 

 

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