1. August Jobs Report Was a Pleasant Surprise… Except
2. The Fed’s Ideal Plan For Normalizing Interest Rates
3. Fed Might Accelerate Rate Hikes in 2019, Stall Economy
4. Fed to Continue Hiking Rates Until Something Breaks

Overview

In light of last Friday’s better than expected jobs report for August, the odds are near 100% that the Fed will hike short-term interest rates by another 25 basis points at its next policy meeting near the end of this month. Odds are also high that there will be another 0.25% hike at the December Fed policy meeting. Until recently, it has been widely expected that the Fed will hike 2-3 more times in 2019, but that view may be changing.

Many Fed-watchers believe a majority of members on the Fed Open Market Committee would like to see the Fed Funds rate end-up about 2% higher than it is today (currently 1.75%-2.00%). As a result, many Fed-watchers are starting to worry that the Fed will accelerate its rate hikes next year and risk a slowdown in the economy. Some believe the Fed could hike rates 4-5 times in 2019, and that would be bad for the economy.

I think this assumption of 4-5 rate hikes or more next year is premature. Part of the reason is that no one, not even the Fed, knows when the next recession will arrive. Plus, President Trump has been critical of the Fed for raising rates, so I doubt the Fed would accelerate its pace of rate hikes for next year. I could be wrong, of course, so that’s what we’ll talk about today.

August Jobs Report Was a Pleasant Surprise… Except

Last Friday’s unemployment report for August was a pleasant surprise in that the economy created 201,000 new jobs last month, well above the pre-report consensus. The initial August jobs estimate has a history of coming in well below expectations, and then gets revised higher in subsequent months. This time, it was considerably better than expected.