The U.S. economy seems to be going through an upswing with new jobs being created at a record pace. Hiring has gone up across all the sectors of the economy and average hourly earnings have seen an uptick as well, even as workers are putting in more hours.
Federal reserve chair Janet Yellen, speaking at a gathering of academics and bankers on Friday, said that the case for a hike in interest rates has strengthened in the last few months, although she did not specify when the central bank was planning to raise the borrowing costs. According to Ms. Yellen, the economy needs to create just 100,000 jobs every month to keep up with the increase in population.

When can we expect a decision?

Although the performance of the labor market has been strong, any increase in future rates is still expected to be gradual. We will know which way the dice rolls after the Fed’s policy meeting this December. Although the federal reserve increased the interest rates just last December, it held off on further hikes due to a slowdown in global growth, volatility in the financial markets and an inflation rate that was below the 2 percent target. The decision is going to be shaped by the incoming economic data for the quarter. As of now, the policy options remain open and members of the Federal Reserve have adopted a more flexible stance with regard to the impending decision.

Low short term risks

The short term risk to the economy seems to have diminishing. If the economic data related to job gains, wage gain and industrial production remains robust, then a rate hike is imminent. The strong job growth over the last few months has reinforced the Fed’s confidence in the labor market and the economy is almost at full employment.

Can faster rate hikes protect the economy?

A hike in the interest rate is a good thing as it can stave off risks to the economy, like rising commercial property prices. This will put the onus on investors, banks and households, who will end up taking the excessive risk. The sooner the Fed normalizes rates, the sooner we can achieve the dual goals of price stability and full employment. But one thing is certainly clear – whatever rate tightening happens, it needs to be slow and gradual while supporting US economic growth. The direction in-which the Federal Reserve is going to take, remains to be seen.