Will the Fed Hike Rates in December despite Weak Fundamentals?
Market Realist – Can we expect a Fed rate hike in December?
Donald Trump’s campaign has always been about restraining the independence of the Federal Reserve and increasing interest rates. Janet Yellen, the Fed chair, has defended her stance, citing the negative repercussions associated with an increase in interest rates in the absence of inflation.
Some believe that if interest rates are raised when macroeconomic fundamentals are weak, the economy will come crashing down.
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The unemployment rate was 4.9% in October 2016 compared to 5.0% in September 2016 and October 2015. However, healthcare, professional and business services, and financial activities recorded growing unemployment. The average monthly rate of employment has risen 181,000 per month so far in 2016 compared to 229,000 per month in 2015.
What about GDP?
Real GDP recorded an annual rise of 2.9% in 3Q16 compared to 1.4% in 2Q16. Real disposable income rose less than 0.10% in September, and real personal consumption expenditure rose 0.30%.
Corporate profits also fell slightly in 2Q16 compared to a rise in 1Q16. However, the current account deficit for 2Q16 fell, driven by primary income from exports and direct investment income from imports.
Export and import prices in October recorded growth on a monthly basis and fell on a YoY (year-over-year) basis. Import prices were driven by fuel prices. The Consumer Price Index, or inflation, rose 0.40% in October compared to 0.30% in September.
On a YoY basis, inflation rose 1.6% in October compared to 1.5% in October 2015. The rise was driven by shelter and gasoline indexes.
Industrial production stayed intact
Industrial production remained intact in October after falling 0.20% in September. Production fell 0.90% on a YoY basis in October.
Gold and the dollar
Some analysts are conjecturing that if the Fed hikes the interest rate, inflation will be driven higher, leading to further rate hikes in the future.
Gold rose almost 4.0% on November 8, 2016. The demand for the metal peaked due to jitters over the anticipation of a Trump victory. The Economic Policy Uncertainty Index for the United States rose 130.2% on November 9, 2016, the day after the presidential election.