With Fed Poised to Raise Rate, Is U.S. Economic Honeymoon Over?

by Reuters, Mike Brunker and Jeff Cox, CNBC /  / Updated 

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WASHINGTON — Solid growth in the number of U.S. jobs last month and the easing of fears about a “hard landing” for the Chinese economy greatly increase the likelihood that the Federal Reserve will raise interest rates in December, a move that will have broad implications for consumers and investors alike.

Friday’s employment report showing the U.S. economy added 271,000 jobs in October dropped the jobless rate to 5.0 percent – a key threshold that many Fed officials see as consistent with full employment.

Perhaps more important than the headline number was the growth in average hourly earnings, which jumped 9 cents, representing a monthly gain of 0.6 percent and an annualized increase of 2.5 percent.

Slow wage growth has been one factor holding the overall inflation rate well below the Fed’s 2.0 percent annual target.

Chicago Federal Reserve President Charles Evans told CNBC on Friday that the stronger-than-expected October report contained “very good news,” particularly on the wage front.

“Strong wage growth would be a very helpful ... pushing inflation up to 2 percent, which is what we need," he said.

October U.S. Jobless Rate Falls to 5%, Likely Spurring Fed Rate Hike

Worries about China and other global problems that caused the Fed to delay an interest rate hike in September also have largely passed, St. Louis Fed President James Bullard said on Friday.

“The probability of a hard landing in China is no higher today than it was earlier this year,” when the Fed was progressing steadily towards higher rates, Bullard, who supports a rate hike, said in a presentation to St. Louis-area financial advisers. He said growth in the country still estimated at close to 7 percent and indexes of financial market stress now back to pre-market levels.

The timing of the Fed’s interest rate hike from zero, where it has been since late 2008, is crucial: If it begins to raise the federal funds rate too soon, the economy could plunge into a recession. But if it waits too long, the economy can “overheat” and unleash double-digit inflation, as occurred in the 1970s.

An interest rate hike, anticipated to be 0.25 percent, would be intended to act as a tap on the brake, slowing growth but keeping inflation in check.

But despite Friday’s employment report, skeptics say the underlying U.S. economy remains weak and that an interest rate hike now could have damaging, unintended consequences.

Among them is Peter Schiff, CEO of Euro Pacific Capital and a contrarian investor, who told CNBC on Friday that retailers would be the first victims

5 Ways a Fed Rate Hike Could Affect Your Pocketbook

"Retailers have overestimated the ability of their customers to buy their products. Americans are broke. They are loaded up with debt," he said.

In his view, the central bank's easy money policies have created a bubble so big that the smallest prick could send the U.S. economy spiraling out of control.

"(The inflated dollar) is keeping the cost of living from rising rapidly and it's keeping interest rates artificially low. It's allowing the Fed to pretend everything is great," Schiff said. "Eventually the bottom is going to drop out of the dollar and we are going to have to deal with reality. That reality is we are staring at a financial crisis much worse than the one we saw in 2008."

For that reason, Schiff says he doesn’t believe the Fed can follow through with an interest rate hike.

"The Fed has to talk about raising rates to pretend the whole recovery is real, but they can't actually raise them," he said. "(Fed Chair Janet Yellen) can't admit that she can't raise them because then she's admitting the whole recovery is a sham and that the policy was a failure."

But most observers say that Friday’s report sealed the deal for the Fed.

With Fed officials already saying they don't want or expect the jobless rate to fall much further, it would likely take a devastating blow in the November hiring data or mayhem in financial markets for the majority of policymakers to give up on their expectation of a hike at their Dec. 15-16 policy meeting.

An interest rate hike would impact consumers in many direct ways, raising monthly credit card interest rates, increasing the cost of buying a home and hiking monthly payments for non-fixed mortgages and injecting more volatility into the stock market.

The stock markets are affected indirectly by the Fed's rate, because investors expect that companies will either cut back on growth or make less profit as it becomes more expensive to borrow. That leads to less demand for stocks, and can lead to broad declines in the markets as a whole.

CNBC's Amanda Diaz contributed to this report.

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