Fannie Mae: New jobs report basically guarantees December rate hike

"We believe that today's firm jobs report seals the deal"

Earlier this week, the Federal Open Market Committee announced that it plans to leave the federal funds rate unchanged, but the way the FOMC framed the announcement led many to believe that a rake hike is coming in December.

And Friday’s jobs report did not contain any significant information that would warrant further delaying a rate hike – in fact, it all but guaranteed a December rate hike, according to Fannie Mae’s chief economist.

According to the latest report from the U.S. Bureau of Labor Statistics, the country’s total nonfarm payroll employment grew by 161,000 in October.

“We believe that today’s firm jobs report seals the deal for a rate increase in December,” Fannie Mae Chief Economist Doug Duncan said Friday.

“The ammunition for a rate hike includes a solid job gain in October, meaningful upward revisions for the prior two months, and the biggest annual wage gain since June 2009,” Duncan said. “The decline in the labor force participation rate is arguably a slight blemish.”

According to the BLS report, the seasonally adjusted labor participation rate fell from 62.9% in September to 62.8% in October.

“However, the drop in the broadest measure of labor underutilization – the U6 – to more than an eight-year low should overcome any concern that significant labor market slack remains,” Duncan said.

Duncan’s sentiments echoed those of Frank Nothaft, CoreLogic’s chief economist, who told the crowd at Wednesday’s "Data, Demand, and Demographics: A Symposium on Housing Finance" presented by the Urban Institute and CoreLogic, that the capital markets are already bracing for a rate hike in December.

But Nothaft noted that even if the FOMC does choose to raise rates for the second December in a row, it won’t impact mortgage interest rates significantly.

“I think mortgage rates are going to be with us for a long period of time,” Nothaft said Wednesday.

“I think we’ll see rates rise from dirt cheap to a very low level as we move into next year, still remaining below 4% all through next year,” Nothaft added. “We’re evolving into a new era in mortgage rates.”

Duncan said that it’s not a 100% sure thing that the FOMC raises rates in December, but notes that recent economic data isn’t providing the FOMC members with much of leg to stand on if they want to delay a hike again.

“As always, a few things can throw a monkey wrench into the Fed’s plan, but the bar for inaction this year is now extremely high,” Duncan said.

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