Investing.com – Markets kept their bets for the first rate hike by the Federal Reserve (Fed) in a year to arrive at the December 13-14 meeting after the unemployment rate hit a 9-year low in November, but mixed data caused investors to slightly reduce the odds for a second policy tightening in June 2017 while keeping an eye out for possible economic policies from incoming President Donald Trump to determine the path of future moves by the U.S. central bank.
Even though the November employment report showed the jobless rate unexpectedly falling from 4.9% to 4.6% and that the U.S. economy created more jobs than expected last month, a series of other data points in the report painted a weaker picture and gave investors pause for thought on the Fed’s gradual return to policy normalization.
The private sector created less of the new job contracts than expected, while the participation rate also edged lower. The number of Americans who are no longer in the work force jumped by 446,000 to an all-time record high of 95.1 million.
Of particular relevance for the Fed’s focus on prices, average hourly earnings declined for the first time in nearly two years. The month-on-month drop brought the annualized increase down to 2.5%, from the prior 2.8%.
Also of note, the October payroll creation was revised down to 142,000 from the initial reading of 161,000.
“The jobs report serves as further inducement for a December Fed hike… but it’s not strong or weak enough to alter expectations of the overall rate path,” Allianz chief economic adviser Mohamed El-Erian commented.
Odds for a rate hike in December remained locked in at 100% on Friday, according to Investing.com's Fed Rate Monitor Tool.
As the move at the end of the year has been fully priced in by markets for the last couple of weeks, attention was moving to when the Fed will make its next policy move.
Fed fund futures showed that the chance for a second move in June 2017 ticked down to 56%, from the 57% before the jobs report was released.
Fed could become “policy dependent” in 2017
Alex Lydall, senior FX dealer at corporate forex broker Foenix Partners felt that November’s report would keep the Fed on track for tightening in December, though the poor wage numbers would give the monetary authority food for thought.
“But the premise of extra fiscal stimulus in a Trump era and letting wages naturally increase as the Fed have reiterated, could leave Yellen pondering future hikes if wages stutter,” he warned.
Capital Economics chief U.S. economist Paul Ashworth was more optimistic of the economic effect of policies that Donald Trump would usher in when he takes over the White House in January and the corresponding impact on the need for the Fed to remove policy accommodation.
“Assuming that we see a major fiscal stimulus passed in the first half of next year, we expect an additional 100 basis points of tightening from the Fed next year, taking the fed funds target range to between 1.50% and 1.75% by end-2017,” Ashton forecast.
Close Brothers Asset Management chief investment officer Nancy Curtin agreed that the swing towards more fiscal stimulus could give the Fed greater scope for policy tightening next year.
“Fed decision making will no longer be solely data dependent, but policy dependent also,” she concluded.