Employment Report Signals More Interest Rate Hikes From Fed

There is no doubt that today’s employment report was a blockbuster – 313,000 new jobs created and both the labor-force participation rate and the employment-to-population ratio increased. In addition, the combined revisions to December and January added another 54,000 jobs. Despite these great numbers, average hourly earnings only went up 4 cents, a drop from the 7 cent gain made in January. Nominal wage growth is still pretty stagnant and inflation-adjusted wage growth has been shrinking as the inflation rate finally begins to tick up.

Sadly, all this report will do is provide even more ammunition for the Fed to raise rates quickly. I would guess that we are now looking at four rate increases in 2018, as opposed to the three that most had expected. And, significantly, the Fed’s focus has shifted completely away from its employment mandate, thinking its job is done there, and is totally focused on maintaining its 2% inflation benchmark and preventing the economy from overheating.

In his testimony on the Fed’s Semiannual Monetary Policy Report on Tuesday morning, Chairman Powell said, “In gauging the appropriate path for monetary policy over the next few years, the FOMC will continue to strike a balance between avoiding an overheated economy and bringing PCE price inflation to 2 percent on a sustained basis.” Notice there was specifically no mention of maximizing employment or maintain a healthy labor market. All the focus was on preventing the economy from overheating and sustaining the 2% inflation marker. In other words, the Fed is preparing to take away the punch bowl and soon.

This is especially distressing simply because both nominal and inflation-adjusted wage growth has been so poor since the Great Recession. One of the bases of monetary policy is that full employment should bring significant wage gains. But here we are, hovering around a 4% unemployment rate, a record low rate not seen since the pre-recession period in 2000, and wage growth is still relatively stagnant. That’s because the idea that full employment actually brings wage gains is entirely a myth. The inflation adjusted hourly wage in 1964 was $19.18 and today it is $20.67. And today it is still lower than levels we saw in the mid-1970s. What’s worse is that most of the wage gains that are produced actually flow to the top 10%: