With inflation in the Fed's spotlight, wages could be a factor in timing of rate increase

As the U.S. Federal Reserve has made clear, future adjustments to short-term interest rates will depend on measurements of broad economic growth, housing markets, consumer behavior, unemployment, and inflation. This last factor has recently floated to the top of the list, based largely on the Fed’s concern that inflation might persist below its preferred target for some time to come.

Though wages are not emphasized as much as commodity prices and other measures, they are among the important forces that are tugging down on inflation, and are thereby influencing the timing of the Fed’s next rate hike. So what do recent wage data suggest? We have two observations:

  • Between 2010 and 2013, U.S. wages barely advanced at all.
  • Today, even though unemployment is well below its 2009 peak, private-sector wages are currently rising by less than 2% per year. (For comparison’s sake, consider that earnings had been advancing by approximately 3.5% annually before the crisis.)

Soft numbers like those above have been viewed by the Fed as evidence that the labor market continues to suffer from considerable slack. A sustainable economic recovery will be difficult to pull off until the situation improves in earnest, making it unlikely that a rate hike will suddenly happen in the near term.

Data: Bureau of Labor Statistics.

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The views expressed represent the Manager's assessment of the market environment as of October 2014, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject to change without notice and may not reflect the Manager's views.

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