Fed can hike: all data has passed the three tests - Rabobank

Analysts at Rabobank noted that the Fed Chair Yellen’s testimony to the Joint Economic Committee of Congress on November 17 suggested that the outcome of the elections a week earlier had not changed the mind of the FOMC.

Key Quotes:

"Moreover, she stressed that waiting for further evidence did not reflect a lack of confidence in the economy. Rather, with the unemployment rate remaining steady this year despite above- trend job gains, and with inflation continuing to run below its target, the FOMC judged that there was somewhat more room for the labor market to improve on a sustainable basis than the Committee had anticipated at the beginning of the year. With respect to the impact of the election outcome on the Fed’s rate path she said that there was still a lot of uncertainty about fiscal policy next year and its inflationary consequences.

Since Yellen’s testimony, Q3 GDP growth was revised upward to 3.2% from 2.9%, while the Atlanta Fed’s nowcast for Q4 GDP growth stood at 2.6% on December 6. This is the pickup in growth that the FOMC was looking for in H2, after the disappointing 0.8% in Q1 and 1.4% in Q2. What’s more, the Employment Report for November showed that nonfarm payroll growth continued at a decent pace of 178K, and unemployment fell to 4.6% from 4.9%. Finally, the PCE deflator – which is the Fed’s preferred measure of inflation – rose to 1.4% in October from 1.2% (year-on-year). So the economic data have passed the Fed’s three tests for a rate hike: a pickup in GDP growth, continued labor market improvement, and rising inflation."