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What Could US Jobs Report Mean for the Fed and Rate Hikes?

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Jan. 4 2019, Updated 7:30 a.m. ET

Fed watching jobs report closely

Fed policymakers are watching job data closely, as the data gives the Fed insight as to whether the US economy (SPY) (IVV) is strong enough to withstand interest rate hikes. The Fed raised interest rates four times last year and signaled two more hikes in 2019, which is in contrast to the market’s expectation of no hike.

The Fed has remained very positive on the tight labor market and has maintained that increasing rates should keep inflation in check. The overall pace of rate hikes could take a cue from this jobs report in addition to other data. Therefore, markets and the Fed would be closely watching it.

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Inflation and interest rates

Higher inflation (TIP) will likely need higher interest rates (IEF) to keep the rising prices in control. An unwise choice by the Fed could trigger a recession or lead to the economy overheating, which aren’t desirable outcomes for a healthy economy.

A downbeat report for December and the months following it would put pressure on the Fed to pause rate hikes. An upbeat report, on the other hand, could keep the Fed on track for another rate hike maybe as early as March. Therefore, a significant surprise to the upside in the jobs report could spook the markets and lead to a sell-off.

Jobs report and dilemma

More recently, a part of the yield curve inverted, signaling investors’ concerns about a potential downturn, which could also act as a dampener on aggressive rate hikes going forward. The number of rate hikes could also change depending on US economic growth (VOO), trade war impacts, and inflation growth.

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