High Wage Growth Means Fed Will Stay on Rate-Hike Course

When the market has been good before the ninth month, its poor rep doesn’t matter.

Wages at long last are heading up. So, if anyone had doubts that the Federal Reserve will ease off its tightening regimen, they shouldn’t any longer.

Increasing hourly wages are a classic precursor to higher inflation, so the pay number released on Friday—which at 2.9% year over year, for all items, exceeded expectations—stirred speculation that the upcoming Consumer Price Index report will come in on the lofty side as well.

Wage growth has been fitful for years, and after an encouraging rise early this year, fell off again. Until the 2.9% August number came out.

Due out on Thursday, the CPI for August will be raptly watched on Wall Street and at Fed headquarters. Chairman Jerome Powell said recently at the Jackson Hole economic gathering that he didn’t think inflation was a big problem.

The Fed wants inflation to be around 2% yearly. But for July, the broad CPI, including food and energy, was a high 2.9%. Indeed, the Fed’s preferred metric, the personal consumption expenditure or PCE, less food and energy, came in at 1.98% for July. The August PCE number will be reported on Sept. 28.

But what if the PCE and the CPI come in hotter for August? As Powell himself also remarked at Jackson Hole, when fighting inflation, history has shown that “doing too little comes with higher costs than doing too much.”

To Ian Shepherdson, chief economist at Pantheon Macroeconomics, the wages trend is definitely up, which means the Fed will keep raising short-term rates.

For August, he wrote in a report on Monday, the “pick-up in wage growth is still modest, but the year-over-year rate will breach 3% in October. Policymakers [at the Fed] are concerned about future wage acceleration; the Fed will keep tightening.”

According to CME Group, the odds are strongest that the Fed will hike by a quarter point at its September meeting, and make another such increase in December. Right now, the central bank’s target range for its benchmark federal funds rate is 1.75% to 2%.

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