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Fed May Quicken Pace on Rates -- WSJ

3 Feb 2018 7:32 am
By David Harrison 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (February 3, 2018).

Friday's jobs report will reassure the Federal Reserve it is on the right track in its plan to raise interest rates several times this year. The question that remains is whether officials will see the need to accelerate the pace of rate increases.

Officials penciled in three quarter-point moves for 2018 at their December policy meeting, but several officials have since raised the possibility of four rate increases.

In the short term, the January employment report does nothing to dispel the widespread expectation that the next rate increase will come at the Fed's next meeting, in March. On Wednesday, officials wrapped up a two-day meeting where they held their benchmark short-term rate steady in a range between 1.25% and 1.5%. They signaled greater confidence that inflation would move up to its 2% target and said "further gradual adjustments" in interest rates were warranted.

Officials will be particularly heartened by the 2.9% year-over-year increase in wages in Friday's report, the strongest annual pay boost since June 2009. That partly could be due to one-time bonuses that some companies gave workers following the passage of the tax-overhaul bill late last year, according to Thomas Simons, an economics for Jefferies LLC.

Still, sustained wage increases in the months ahead could be a sign that low unemployment rates and the persistent anecdotal evidence of labor shortages are finally showing up in the wage data. Fatter paychecks could also push up inflation, which has fallen short of the central bank's 2% target for most of the past five years.

That could prompt Fed officials to pencil in a fourth rate increase this year.

"The issue of whether we should have three or four rate hikes this year is really going to be driven by the data and changes in the outlook," San Francisco Fed President John Williams told reporters Friday. "Both of those kind of possibilities are reasonable to think about as options."

Sluggish wage growth since the recession has been a nagging preoccupation for the Fed. During his Senate confirmation hearing in November, incoming Chairman Jerome Powell singled out wage gains as an indicator he was paying particularly close attention to.

In a separate report released Thursday, the Labor Department reported that wages and benefits for civilian workers were up 2.6% over the past year, matching the largest annual increase since 2015.

Following Friday's jobs report release, market probabilities of four Fed rate increases this year rose to 21.9%, from 19.6% on Thursday, according to CME Group data.

Friday's report appeared to sway Minneapolis Fed President Neel Kashkari, one of most reluctant officials to raise rates. "If wage growth continues, that could have an impact on the path of interest rates," he told CNBC.

Employers added 200,000 new jobs in January, the report said, holding the unemployment rate steady at 4.1%. Fed officials consider a 4.6% unemployment rate as the threshold for a labor market running at full strength. Moving too far below that could be a sign the labor market is getting overheated, which could lead to a rapid increase in inflation that the Fed would have to tame with potentially destabilizing rate increases. In its December economic projections, officials predicted the unemployment rate would fall to 3.9% by the end of the year.

The report also includes some reasons for caution.

The labor-force participation rate held steady at 62.7% in January for the fourth straight month, suggesting it may be settling at a lower rate. A decade ago, in January 2008, the participation rate was 66.2%.

Male labor-force participation moved up 0.2 percentage point to 69.2%, but remains well short of its prerecession level. Female participation dropped 0.2 point to 56.7%.

Mr. Powell has cited the participation rate, particularly among working-aged men, as another indicator he pays close attention to.

"That is the one measure, I think, that stands out now as suggesting that there may be more slack, more people that can come back to work," he said in his confirmation hearing.

The unemployment rate for African-Americans also moved up, to 7.7% from 6.8% in December, its lowest level on record.

Fed officials will see one more jobs report and three separate inflation readings before their March 20-21 meeting.

Michael S. Derby contributed to this article.

Write to David Harrison at david.harrison@wsj.com

(END) Dow Jones Newswires

February 03, 2018 02:32 ET (07:32 GMT)

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