December rate hike still expected by economists, if not market, after jobs report

Posted by jbrumley on September 1, 2017 10:27 AM

- Fed still seen raising rates in December after announcing plan to shrink balance sheet later this month -

By Greg Robb, MarketWatch

The mildly disappointing jobs report in August will be little more than a speed bump on the Federal Reserve’s road to continue tightening, economists said Friday.

Fed watchers think the Fed is locked in to a plan to announce its intention to shrink its massive balance sheet at its meeting in 20 days.

And they expect the Fed to follow through with a another rate hike in December.

“The August jobs report is not going to throw them off track,” said Omair Sharif, senior U.S. economist at Societe Generale, in an interview.

The U.S. added 156,000 jobs in August, below consensus estimates of a gain of 170,000. There were also downward revision to job growth in June and July.

“Obviously it is a little bit softer than expected, but I don’t think it changes the outlook for the Fed,” said Kevin Cummings, senior U.S. economist at NatWest.

“I don’t think this is going to derail them from earlier guidance of one rate hike per quarter,” he said.

The Fed is just substituting a balance sheet announcement for a rate hike this month.

Cummings said that announcement is “pretty much a done deal.” He said there does not seem to be any opposition to the plan from the doves on the central bank’s policy committee.

A December rate hike is obviously more of a question because it is three months away. Some Fed officials say they want to see signs inflation is picking up before they back another rate hike, the third one this year.

Both Cummings and Sharif think a December rate hike is likely.

“It would likely take clearer signs of labor market softening, or political turbulence, to derail a year-end rate hike,” said Sal Guatieri, senior economist at BMO Capital Markets.

Investors see only a 36% chance of a rate hike in December, according to the CME Group’s FedWatch tool.

But events earlier this year show that Fed jawboning can raise these odds quickly.

Krishna Guha, vice chairman of Evercore ISI, noted there is no pressure for the Fed to pre-call the December meeting with a lot to happen between now and then.

The economists said the Fed is likely to look through the damage caused by Hurricane Harvey because they focus more on the 12-18 month horizon.

From MarketWatch