Why the Fed Can Ease Up on the Gas

(Originally published here.)

Score one for the hawks.

Today’s release of February jobs numbers showed that the growth in average hourly pay continues to accelerate, another piece of evidence that the time may be right for the Federal Reserve to begin raising interest rates.

From the end of 2008 through the end of 2012, wage growth slowed from almost 4 percent annually to just 1.3 percent. Since then, it’s picked back up again, growing at an annual rate of 2.5 percent. That’s still pretty slow, but it’s the fastest pace in almost four years, which helps explain why many investors now believe the Fed will end up raising short-term interest rates sooner than it’s currently forecasting.

Weekly earnings data tell a different story, although that data should probably be written off as an artifact of the weather — snowstorms prevented people from working a full week.



If wages were the only thing going up, it wouldn’t justify a re-evaluation of the Fed’s stance. Income growth is still very weak, even if it is moving in the right direction. Besides, the U.S. would probably benefit from a period of above-normal wage growth, which would help workers make up the ground they’ve lost over the past six years. The extra spending from the employed would boost corporate revenues and potentially justify hiring some of the millions of unemployed Americans in their prime working years.

But the growth in wages isn’t happening in isolation. Economists at the San Francisco Fed estimate that the “natural rate” of unemployment is around 6.6 percent. We are now at 6.7 percent. What’s more, asset prices for everything from emerging-market currencies to coffee to the price of tech stocks have been on a tear recently. And lenders have been weakening loan covenants for corporate borrowers — another sign that monetary policy is in danger of being too loose.

In fact, new research suggests that the risks investors have been taking over the past few years could lead to “a future bout of financial distress.” Bottom line: The U.S. economy can afford a monetary policy that isn’t so loose. Today’s jobs numbers back that up.

(Matthew C. Klein is a writer for Bloomberg View. Follow him on Twitter at @M_C_Klein.)

To contact the writer of this article:
Matthew C. Klein at mklein62@bloomberg.net.

To contact the editor responsible for this article:
Christopher Flavelle at cflavelle@bloomberg.net.


About Matthew C. Klein

I write about the economy and financial markets for Bloomberg View. Before that I wrote for The Economist on a fellowship provided by the Marjorie Deane Financial Journalism Foundation. I have worked at the world's largest hedge fund and read every FOMC transcript since May, 1987.
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