Traders Anticipate Higher Probability of Fed Rate Hike in 2016, According to Reuters

Traders heightened their expectations on Friday regarding a potential interest rate increase by the U.S. Federal Reserve, with forecasts suggesting a possible hike as early as December. This shift followed a government report indicating that U.S. employers created more jobs than anticipated in the previous month.

Current trading in futures contracts linked to the Fed’s benchmark policy rate reflects approximately a 46 percent probability of a rate increase by year-end, compared to around 34 percent before the report was released. Additionally, traders now view a hike as more likely than not by May, in contrast to expectations from late 2017.

According to the government report, nonfarm payrolls rose by 255,000 in July, hourly wages increased by a robust 8 cents, and a greater number of individuals returned to the workforce. Doug Duncan, chief economist at Fannie Mae in Washington, stated that these indicators suggest the economy is progressing in a manner that the Fed desires.

However, Duncan also noted that the Fed remains vigilant regarding international developments, which could affect its timing on future rate increases. The Federal Reserve last raised rates in December, concluding a seven-year period of historically low rates. Since then, it has faced challenges in further adjustments due to sluggish growth rates in regions such as China and Europe, which have strengthened the dollar and impacted domestic economic performance.