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Chart of the week: has the fed cause to pause on raising us interest rates?
 

05 February 2019

Bob Cunneen, Senior Economist and Portfolio Specialist

 

US interest rates (Fed funds interest rates) vs Wages (Average hourly earnings)

Source: Datastream.

 


The Federal Reserve (Fed) signalled at January's policy meeting that it will be “patient” on future US interest rates settings given “global” conditions and "muted inflation pressures”. This comes after three years of raising the key Fed funds interest rates to the current range of 2.25% to 2.50% (red line). This can be favourably viewed as merely a temporary ‘pause’ in the Fed raising interest rates or, more ominously, as the end of the interest rate cycle as the US economy falters towards a recession.

The Fed is leaning towards the more positive assessment. Notably the Fed is still positive on the US economy given ‘solid’ economic activity and ‘strong’ jobs gains. January's payrolls result also displayed that wages pressures are building as seen in the average hourly earnings measure posting annual growth at 3.2% (blue line). Essentially with the US unemployment rate falling to a multi-decade low of 4%, US employees now have more bargaining power to push for higher wages.

While the Fed can take some comfort that the current wage acceleration is mild by historical standards, the central bank cannot be complacent that US inflation pressures will remain ‘muted’. Current global worries such as President Trump's Twitter tirades on trade, China's slowdown, Brexit and Italy's recession may temper price pressures for now. Yet with such a strong US jobs market and the potential for global surprises, the Fed's pause on interest rates could end in a blink of an eye should US wages accelerate, commodity prices surge, or the US dollar dramatically falls.

 

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