Good Economic News Signals Rate Hikes Coming Soon

The solid November jobs report released today shifts the big economic question from when will the Federal Reserve raise a key interest rate to how quickly will it go up.

Economists said the solid 211,000 net new jobs added last month makes a long anticipated increase in the benchmark federal funds rate this month virtually a done deal.

The central bank’s policymaking Federal Open Market Committee hasn’t raised the rate in nearly a decade, and it’s been near zero since late 2008 in an effort to stimulate the economy. Fed Chairwoman Janet L. Yellen and others have signaled a small rate hike could come at the committee’s Dec. 15-16 meeting.

Yellen has said the Fed would raise the rate gradually to avoid shocking the economy. The first move is expected to be just a 0.25-percentage-point increase, and Fed policymakers could wait until June to nudge it up by that amount again.

There is talk that if job growth continues to be 200,000 per month, the think the fed funds rate will be higher than 100 basis points a year from now.

Investors were encouraged by the strong jobs report. The Dow Jones industrial average shot up about 250 points in early trading. That followed a 252-point decline on Thursday, after new stimulus measures from the European Central Bank fell short of expectations.

Friday’s jobs report exceeded expectations. Economists had forecast a gain of about 190,000 net new jobs.

The unemployment rate held steady at 5% in November, the lowest level in more than seven years, and it did so for good reasons. About 273,000 people joined the labor force last month, lifting the closely watched participation rate up a bit to 62.5%, though still an historically low level.

For the 12 months ended Nov. 30, hourly wages are up 2.3%, well above the low inflation rate.

The Labor Department revised up job growth for September and October by a combined 35,000. The revisions put October job growth at 298,000, the best month since last year.

Job growth has averaged 218,000 the past three months — and for the 12 months ended Nov. 30, the labor market has added an average of 237,000 net new positions.

The strong housing market was a big factor in November’s job gains. Construction companies added 46,000 net new jobs, the most in nearly two years. Payrolls at restaurants and bars increased by 32,000, while retailers added 31,000 net new positions and healthcare providers added 24,000.

But manufacturers continued to be hurt by the strong dollar, which makes U.S. goods more expensive abroad. The sector lost 1,000 net jobs in November, the third decline in four months. A big factor is the loss of mining jobs because of the drop in oil prices. That sector lost 11,000 jobs in November and has shed 123,000 positions this year. With that said, an interest rate increase in December shouldn’t hurt the industry because it’s been assumed to be coming soon.

But the pace of rate hikes could be a factor if the global economy doesn’t improve. The real question at this point is not so much the first increase but when should we expect the second increase and how much will rates rise in 2016?