The Federal Reserve is likely to raise rates in December. At least that's what the markets are telling us. The implied probability of a rate hike based on Fed funds futures is currently 66 percent, up from 27 percent only a month ago.
For months, Fed officials have hinted that they would like to raise interest rates sometime this year, but choppy economic growth in the U.S. and even choppier growth outside the country have made the central bank reluctant to pull the trigger.
US Economy Strengthens
But now that may be changing. Two key economic data points released during the past month indicate that the world's largest economy may be strengthening despite head winds overseas.
ISM said that its nonmanufacturing index ticked up to 59.1 in October, a robust level that indicates strength in the U.S. services sector, the largest segment of the economy.
Shortly thereafter, the government reported that U.S. employers added 271,000 jobs in October, much more than analysts were predicting. That pushed the unemployment rate to a seven-year low of 5 percent.
Critically, average hourly earnings grew by 2.5 percent year-over-year in the month, the fastest pace since the financial crisis. Previously, Fed officials cited a lack of wage growth and a lack of inflation as reasons to hold off on hiking rates. Now that wages may be accelerating, that gives the central bank impetus to begin normalizing monetary policy.
Of course, financial markets aren't too excited about the prospect of the first rate increase in 9 ½ years. Ultra-low borrowing costs fueled strong gains in both stocks and bonds during the past several years.
With the zero-rate environment poised to end, certain asset classes and sectors may feel the pressure. But it's not all bad news; there are, in fact, some areas that stand to benefit from higher interest rates. Here are the exchange-traded funds that may be impacted by rising rates: