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Nov. 9, 2015, 10:02 a.m. EST

As Fed gets green light for December rate hike, focus swings to 2016

Blowout jobs report raises odds that rates will rise in December

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By Greg Robb, MarketWatch


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Federal Reserve Board Chairwoman Janet Yellen has been sounding hawkish of late, and the jobs report backs up her stance.

The blowout October jobs report gives the Federal Reserve the green light to raise interest rates next month — and many economists and traders are speculating about what that means for moves in 2016.

The U.S. added 271,000 jobs in October, topping the MarketWatch-compiled economist consensus of 180,000.

“The report strengthens our conviction the Fed will hike in December,” said Dana Saporta, a U.S. economist at Credit Suisse.

Saporta said it was too strong to say a December rate hike is a done deal, but the October report is so strong that the central bank could justify an increase even if the November data come in on the weak side.

A rate hike in December would be the first such move in nine years. Rates have been near zero since late 2008.

Carl Tannenbaum, chief U.S. economist at Northern Trust in Chicago, agreed that the Fed would move next month. “The figures solidify the case for an interest-rate increase in December,” he said.

Tannenbaum pointed to the 2.5% annual gain in hourly wages in October, the biggest gain since the end of the recession.

This is a “resounding response” to doves on the Fed who doubted that low unemployment would lead to higher inflation, a relationship known as the Phillips curve. Fed Gov. Lael Brainard and Daniel Tarullo had recently raised doubts about the theory.

Financial markets agree that the Fed is more likely to act as well. Odds of a December hike have now jumped above 70%, according to the CME Group’s FedWatch tool . Last week, they were less than half that.

Even one of the Fed’s strongest doves had some upbeat words. In an interview with CNBC after the data came out, Chicago Fed President Charles Evans called the October job gain “a good number” and said a rate hike was a live option at the December meeting.

Evans has previously urged his colleagues to hold off hiking rates until 2016.

The Fed policy maker told CNBC the entire path of rate increases will determine whether the central bank is accommodative or restrictive.

“I think we need to have communications which indicate the path is going to be gradual,” he said.

In a recent speech, Evans said he thought the fed-funds rate could still be under 1% at the end of 2016.

Paul Ashworth, chief U.S. economist at Capital Economics, said after the jobs report that he expects the funds rate to be close to 2% by the end of 2016.

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