Strong Employment Report; Rate Discussion
Rates increased again this morning in response to a strong employment report. Job creation was up more than expected; the unemployment rate dropped more than expected, and wage rates increased more than expected.
This surprisingly strong report makes it more likely that the Fed will actually raise rates in December, but we’ve heard this before (many times).
The Fed wants to find a reason to raise rates so they have some ammunition should another recession hit; the Fed likes to reduce rates when a recession hits to stimulate the economy. And right now, they would be unable to reduce rates b/c they are at zero already, where they have been for years.
The Fed is under political pressure to not raise rates b/c many politicians and other pundits fear that a rate increase will too severely hamper an already precarious economy. So, the Fed needs strong justifications, like today’s employment report, to raise rates.
Keep in mind that the Fed only controls the Fed Funds rate, or the very short-term rate it and banks charge each other for overnight borrowing. The Fed does not control mortgage rates. Increasing short term rates affects long term (mortgage) rates, however, b/c the increases usually affect borrowing costs across the yield spectrum eventually.
Will rates continue to remain at their higher levels (3/8 higher than they were a month ago) or continue to climb? It remains to be seen. The world economy overall is very weak, and it would not be surprising to see to some significant negative economic news surface that would force the Fed to back off on its desire to raise rates.
In other words, don’t panic yet. And besides, many economists think higher rates will strengthen the economy overall, eventually bringing more buyers out of the woodwork.
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