The steady drop in the U.S. unemployment rate has set up a simple set of arithmetic that will lead to a Federal Reserve interest rate rise soon to ward off future inflation, according to the most accurate forecaster in Reuters polls last year.
Jim O’Sullivan, chief U.S. economist at High Frequency Economics, isn’t yet completely convinced that Janet Yellen’s Fed will begin raising rates in June. But he says it’s only a matter of time before they will have to.
“The idea that the economy is so fragile that it can’t take a rate hike? I don’t think so,” he said.
He doesn’t believe that the U.S. being a lone engine of growth, while many parts of the world economy remain at risk to a renewed downturn, will prevent the Fed from focusing on its mandate of full employment and low inflation.
What concerns O’Sullivan in terms of judging the timing of the first U.S. rate hike in a decade is that even the core measure of inflation the Fed watches has remained surprisingly low at a time when the job market has taken off so strongly.