Higher Treasury Yields Point To A Rate Hike Next Week

The case for raising interest rates is wobbly at best, but the Federal Reserve may start the squeezing process at its monetary policy meeting next week. Exhibit A for the hawkish view is the encouraging rise in nonfarm payrolls in October and November. The problem is that there’s no shortage of data that paints a softer profile, including the Atlanta Fed’s GDPNow model, which is currently projecting (as of Dec. 4) a tepid 1.5% rise in US GDP for the fourth quarter.

“The unfortunate thing is that if you raise interest rates there is a risk — again, it may be small, but it’s a significant risk — that you will slow down the recovery,” economist Eric Maskin, who won the Nobel in economics in 2007, told Bloomberg yesterday. “Maybe she knows something that I don’t know, and she sees signs of inflation I don’t see, but I really don’t understand why it’s so important to raise interest rates when there is so little to be afraid of.”

Even on the employment front the recent news on payrolls may be overstating the case for growth. Two updates this week for a pair of multi-factor benchmarks that measure activity in the labor market suggests that the job growth is weaker than it appears via the government’s monthly numbers. The Conference Board’s Employment Trend Index posted its biggest monthly drop in November since the Great Recession, which “suggests caution in extrapolating the current trend of job growth,” the consultancy advised. Meanwhile, the Federal Reserve this week reported that its Labor Market Conditions Index ticked lower last month, dipping to its lowest reading in seven months.

Surveying a wide mix of figures, Harvard’s Larry Summers wrote earlier this week that the macro profile at the moment “leaves me far from confident that there is substantial scope for tightening in the US.”