The next policy meeting of the Federal Reserve is fast approaching. Policy makers at the US central bank are certainly in a challenging situation and are finding it difficult to decide whether it is best to start increasing interest rates immediately or put the rate hike on hold until December or even later.
I believe that the US jobs data, which will be released on Friday, may serve as one of the deciding factors. Whether the jobs report is upbeat, downbeat, or so-so, it will certainly be one of the things that the Fed will consider for it tells something about the domestic economy.
If US economic data are everything that concerns the central bank, the solid job creation, improved gross domestic growth, and the broad-based economic activity that stays on track justify the first interest rate hike in over 9 years.
Aside from the weakness in the global economy, another problem that the Fed is experiencing is the uncertainty about how its policy move could adversely affect the growth of the domestic economy by worsening the global financial instability. Moreover, there is also a risk of spill back from outside the United States.
Based on recent events, it can be concluded that emerging countries, led by China, are experiencing economic slowdown. It also seems like the downturn of the emerging world is unlikely to be offset by growth in the United States and Europe. Furthermore, there are also worries that the market turmoil in emerging economies, as well as the chaotic currency devaluations, could negatively impact the real economy of these countries and then spread to developed nations.
Given this kind of situation, it is understandable for the Fed to thoroughly deliberate before moving to increase interest rates, which could heighten global instability.
As mentioned earlier, the August jobs report could be the clincher.
Continued upbeat jobs data, with a significant increase in wage growth, could encourage the central bank to hike rates this September. On the other hand, if the report shows downbeat data in the form of slow wage growth and a sluggish pace of job creation, the Fed might opt to maintain the status quo.
If, however, the jobs data are so-so, it could prompt the US central bank to wait until the economy of the US is resilient enough.
In a calmer global economic situation, investors and market analysts wouldn’t put too much attention on the timing of the interest rate hike, especially with the robustness of the US economy. However, the extreme volatility in financial markets and the weakness of the world economy lead the Federal Reserve to worry about the global condition and its repercussions. With this, a notably strong US jobs report will give the central bankers some confidence to push interest rates in the following month.