Economy: Federal Reserve - Why It Is Time To Hike Interest Rates

(Drivebycuriosity) - Wall Street is waiting for the verdict. Next Wednesday the Federal Reserve Bank will announce her interest rate decision. At the latest meeting in September Janet Yellen & Co. shied away from the interest rate hike that many had expected. We learned that several members of the monetary committee saw a risk that the additional downward pressure on inflation from lower oil prices could persist (calculatedrisk).

On Friday oil (brent crude, the international oil gauge) cost $47, about the same price as on September 17th, the day of the latest Fed meeting ($47) and close to the low from January ($46.59). So, since January oil didn´t get any cheaper! (bloomberg) The downward pressure had already disappeared in the recent months! It seems that the oil price is sticking close to the $50 mark bolstered by reports about a shrinking US oil production. Meanwhile the basic inflation rate is advancing. The US core inflation rate (without food & energy) advanced in September to 1.9% (August 1.8%), driven by climbing rents and more expensive services, especially rising health care costs.

Fed´s decesion against an interest hike in September might als have been influenced by the turbulences on the global financial markets in August & September, but since then the markets calmed: Wall Street (S&P 500) gained 4%, China´s stock market (Shanghai Composite) jumped more than 10% and the Chinese currency (Yuan) stopped her decline as well.

Zero interest rates don´t fit to a growing economy. US weekly jobless claims are on a 40 years low (bloomberg), retail sales are growing with a solid speed (ex-gasoline plus 4.8% on a YoY basis calculatedrisk) and on Friday we heard that manufacturing in US & Europe rebounded this month (capital).

It is likely that in the coming months the tightening labor market will drive wages and therefore labor costs upwards which should translate into higher prices for services and labor intensive goods. And we are already experiencing rapidly climbing rents and health care costs. Zero interest rates for too long could lead to an overheating labor market and push the core inflation rate higher.