Let’s say you are Janet Yellen.
As chair of the Federal Reserve, you must decide next month whether to hold down — or nudge up — interest rates. This huge decision could affect virtually all Americans who borrow money, which a lot of people do during the holidays.
So you, Janet, must be sure the U.S. economy is strong enough to handle higher borrowing costs in December.
And that’s why you may have broken into your happy dance on Friday after the Labor Department said job growth surged last month.
Employers added 271,000 jobs in October, far exceeding economists’ forecasts. The unemployment rate slipped a tenth of a point to 5 percent, and average hourly earnings moved up 0.4 percent, double what economists had been expecting.
Ho, ho, ho!
The surprisingly strong labor news pretty much removed economists’ doubts about whether the Fed policymakers should begin the long, step-by-step process of raising interest rates to more normal levels. What might have been a tough decision now looks easy.
“The October surge in employment, coupled with measurable wage gains, will give the Fed the green light needed for liftoff in December,” Diane Swonk, chief economist with Mesirow Financial, wrote in her assessment.
Yellen and her fellow policymakers will meet Dec. 15-16. The Fed has not raised rates since the summer of 2006, when the housing bubble was still inflating. The central bank started cutting rates in 2007 and kept pushing them down until the federal funds rate was near zero in December 2008.
Rates set by the Fed serve as a benchmark for lots of other interest rates. So the Fed’s actions back in 2007 and 2008 have rippled out in the form of cheaper credit cards, home equity loans and mortgages. Here’s one more example: car-loan rates have dropped by half since the Great Recession.
So now, with the jobless rate back at a healthy 5 percent, most economists say the Fed needs to return the country to a more traditional borrowing environment. Otherwise, cheap loans might encourage the kind of foolish borrowing that we saw during the shop-til-you-drop era before the recession.
On Friday morning, Realtors were among the first to concede that the days of mortgages below 4 percent are coming to an end.
“Today’s job report will influence the long-term bond market, so mortgage rates will increase in response,” Jonathan Smoke, chief economist for realtor.com, said in a statement. “The 30-year conforming rate will likely top 4 percent as a result of this news.”
But while no one likes to see monthly payments going up, these developments really are a good sign for most Americans. “The healthy, strong employment results for the past two years created an uptick in household formation, which has driven increased demand for home purchases and rentals,” Smoke said.
That’s really the key to understanding where the economy is heading. Yes, soon the Fed will be inching rates up higher, so you may well pay more for your variable-rate debts such as credit cards, adjustable-rate mortgages and home equity lines of credit.
But you also will be more likely to get a raise. And if you’ve been itching to change jobs, you’ll be more likely to find one.
Think of it this way: In October 2009, interest rates were deeply depressed, but unemployment was running at 10 percent. In October 2015, interest rates were poised to rise, but unemployment was 5 percent. Which October made most Americans feel better?