The American economy continues to show strength, with November non-farm jobs increasing by 228,000. The consensus forecast was 195,000 growth.
The latest higher-than-expected data increases the likelihood of a rate rise in December, with analysts expecting an increase of 25 basis points. That will raise the federal funds rate to 1.5%.
Impact on Asia
"We look for three rate hikes in 2018, athough we expect to see greater inflationary pressure from wages during this period," says Keith Wade, Chief Economist & Strategist at investment management firm Schroders. Other analysts forecast as many as four increases under new Federal Reserve Chair Jerome Powell, who is awaiting confirmation by the Senate.
The pace of interest rate increases in the US is closely followed in Asia because companies in the region are exposed to US-dollar debt. Asian central banks may also be pressured to raise local interest rates. Hong Kong, whose currency is pegged to the US dollar, will have no choice but to follow the US lead.
Under current chair Janet Yellen, the US central bank has signaled that interest rates will rise to 2% in 2018 and 3% in 2019, despite the lack of inflationary pressures in the US. Inflation has yet to reach the 2% Fed target rate, a phenomenon that has puzzled the Fed given the strong increases in job growth.
Companies, however, have not been under pressure to raise wages, which could have helped stoke inflation. In the November report, wage growth remained subdued at 2.5% year-on-year, lower than the expected 2.7%, says Wade.
Like other economists, he believes that there is still spare capacity in the US labor market despite the over-performing jobs numbers.
"We have focused on the employment/population rate as a measure of labour market slack and this fell from 60.2 to 60.1, indicating that the steady increases in participation seen earlier in the year may have temporarily stalled," he says.
"The rate remains well below pre-crisis levels and is consistent with some spare capacity, unlike unemployment which at 4.1% is still signalling a tighter labour market."