Week Ahead: At Long Last, A Rate Hike?

Unless something extraordinary occurs between now and then, the Federal Reserve will almost-certainly raise interest rates for the first time in nearly a decade next week at the conclusion of its  December meeting.

Everything happening in the world of finance will be dominated in the coming days by that single decision.

The policy-setting Federal Open Market Committee meets Tuesday and Wednesday in Washington, D.C., and all roads seems to be leading toward a small rate hike of 0.25%. The Fed will announce its decision at 2:00 p.m. on Wednesday.

“The rationale for expecting action next week is pretty straightforward: Two weeks ago, Chair (Janet) Yellen indicated that the conditions the committee has set for liftoff were close to being met – a statement which was followed shortly after by a strong payroll report further supporting the case for a hike,” analysts at J.P. Morgan said in a research note on Friday.

Earlier this year, the Fed established two conditions for raising rates: “further improvement” in labor markets, and “reasonable confidence” that inflation is moving higher toward the Fed’s 2% target.

Two consecutive strong labor reports -- October and November -- have certainly shown “further improvement” in the jobs market, and recent hints that wages are moving higher are fueling belief that inflation will soon be ticking higher as well.

The Fed has said for months that any decision to raise rates will be “data dependent,” and most of the recent data has built momentum toward a Dec. 16 rate hike. What’s more, virtually every public statement out of the Fed – notably from such influential members as Yellen, Vice Chair Stanley Fischer and New York Fed President William Dudley – has suggested a December liftoff.

Rates have been held at a near-zero range since December 2008 when they were slashed to an unprecedented low level amid the darkest days of the financial crisis. Since then the unemployment rate has fallen to 5%, below the level where it stood at the beginning of the crisis, and all of the 8.7 million jobs lost during the recession have been recovered.

While the low-rates and other interventionist measures adopted by the Fed in the aftermath of the crisis have hardly proven a panacea for the world’s economic woes, the policies likely staved off another Great Depression. Now Fed officials, anxious to “normalize” monetary policy, evidently believe the U.S. economy is strong enough to absorb the higher borrowing costs that will follow a rate hike.

A handful of other bellwether economic indicators will also be released next week, including the inflation-measuring Consumer Price Index on Tuesday and a report on housing starts on Wednesday.