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By Taylor Tepper
August 5, 2016
Bebeto Matthews—AP

Federal Reserve chair Janet Yellen is stuck.

Employers added 255,000 new jobs in July, a whole octave higher than expected, and actually hired 18,000 more employees in May and June than was previously reported.

That brings the average job gains over the past three months to 190,000. Perhaps more importantly hourly wages grew by 2.6% over the past year. Not only was that much faster than the overall 1% rate of inflation, it even eclipsed the 2.3% rate of “core inflation” which strips out volatile energy and food prices.

Americans might finally be receiving their long-awaited raise.

With two consecutive robust job reports, and the unemployment rate nuzzled firmly below 5%, can the Fed now feel confident in bumping rates in their next meeting in September?

“On the whole, this morning’s strong July employment report indicates that labor market health remains intact and, in our view, reduces near-term recession risk for the U.S. economy,” writes Barclays’ Jesse Hurwitz. “We continue to expect the Fed to hike rates at its September meeting, and we look to Chair Yellen’s appearance at the Jackson Hole Policy Symposium on August 26 for confirmation of this view.”

Yet the case isn’t as ironclad as you’d might think:

Weak Global Growth

At the start of the year Fed officials mused about the prospect of raising short-term interest rates four times in 2016, yet world events didn’t play along.

Fears over lackluster Chinese economic growth returned once again at the start of the year, coupled with the dramatic decline of energy prices that nearly gave market participants a panic attack.

Then Britain’s decision to leave the European Union caused an ephemeral setback in the markets, but forced the Fed to pause any plans for a hike.

Other Central Banks are Cutting Rates

The Bank of England cut its key interest rate to a 332-year low this week in an effort to inject stimulus into the U.K. economy as a guard against deleterious effects from the Brexit.

Britain’s central bank also lowered its outlook for growth next year, and economic officials around the world will keep a close eye on the U.K. to see if weak growth there will bleed into other nations.

But a rate increase by the Federal Reserve in September, which would curtail demand for loans and economic activity, might cancel out any stimulative effect of the Bank of England.

Signs of Weakness Elsewhere in the U.S. Economy

Meanwhile, the U.S. economy is not entirely on firm footing yet.

While businesses are hiring more, they are investing less in other aspects of their operations, which caused the domestic gross domestic product to grow a microscopic 1.2% in the second three months of the year, according to the Commerce Department. The economy has expanded at a meager annual rate 2.1% since 2009, which marks this recovery as historically weak.

Only 39% of private companies feel optimistic about the U.S. economy, according to the PricewaterhouseCoopers Trendsetter Barometer.

“We now need structural reforms and other fiscal policy,” Robert Kaplan, the Dallas Federal Reserve Bank President, recently said. “Then we will have more operating room where we can normalize rates.”

Given the fractured nature of our political climate, a response to current economic weakness by the federal government seems unlikely.

There will be another jobs report between now and the Fed’s September meeting, plus a host of other economic indicators to get a grasp of where the U.S. economy is headed. If hiring continues to be strong, and inflation is still rising crisply, perhaps the Fed will feel emboldened to increase rates.

But as 2016 has taught us, expect the unexpected. Few believed, for instance, that British voters would make the Brexit a reality. Anything can happen between now and September.

 

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The purpose of this disclosure is to explain how we make money without charging you for our content.

Our mission is to help people at any stage of life make smart financial decisions through research, reporting, reviews, recommendations, and tools.

Earning your trust is essential to our success, and we believe transparency is critical to creating that trust. To that end, you should know that many or all of the companies featured here are partners who advertise with us.

Our content is free because our partners pay us a referral fee if you click on links or call any of the phone numbers on our site. If you choose to interact with the content on our site, we will likely receive compensation. If you don't, we will not be compensated. Ultimately the choice is yours.

Opinions are our own and our editors and staff writers are instructed to maintain editorial integrity, but compensation along with in-depth research will determine where, how, and in what order they appear on the page.

To find out more about our editorial process and how we make money, click here.

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