The good jobs report on Friday puts the Fed in a position that they may not have actually wanted to face. The Fed has been speaking about an interest rate hike for the past year, but has been pushing it off regularly as data refused to give them the ammunition to justify the hike. However, after the good results on the Non-Farm Employment Change figures this past Friday, the Fed finds itself in a position in which they will almost be forced to raise the key rate by .25%, having to back up their bravado for the past half year.
The problem is that the rate increase could have a negative impact, the USD could get stronger and commodity prices globally could face continued pressure. A stronger USD is not going to help the economies of developing countries, nor China, nor Europe. The American economy is not extremely strong and consumers could be put under pressure if their credit becomes more expensive.
China economic concerns continue. Growth numbers from the Asian giant remain lackluster and will likely continue to be problematic. In Europe, Germany now faces a gauntlet of challenges via less demand for products manufactured there because of stagnation which continues to baffle Europe, and the VW scandal which will cost billions. The ECB will be in the dubious position of watching the Fed raising interest rates, while the European Central Bank has to actually consider more stimulus and become increasingly dovish.
So while the Fed now gets the chance to put their money where their mouth is, in fact an interest rate hike could put pressure on an American economy, which is not growing by leaps and bounds – the quiet GDP numbers are an example, and the U.S. stock markets may begin to get nervous. There is however the contrarian thought which must be paid attention to, and that is that ‘smart money’ has likely braced themselves for an interest rate hike. It must be said that a rise of .25% should it occur in December is not a huge rise in actuality and the likelihood is that many investment houses in essence have known that the small increase is coming.
The problem is what the effects will be globally on a worldwide economy that has been struggling. Brazil and China are going to feel the effects of an interest rate hike as much as anyone and the IMF and World Bank will have to brace themselves for repercussions. Thus, the Fed maybe just as scared as everyone else, now that they are in a position to prove their chatter about a good American economy and thus showcase that an interest rate hike can enhance their monetary policy, instead of stalling the engines that have been trying to pull the train up a steep path to the recovery from the 2008 financial debacle that has long persisted.