Highlights:
- Payroll employment rose 200k in January up from an upwardly revised 160k gain in December.
- The January unemployment rate held steady at December’s rate of 4.1%.
- The annual increase in wages rose to 2.9% in January from an upwardly revised 2.7% in December.
Our Take:
Indications of solid hiring by businesses provide reason to expect that overall GDP growth will likely remain above-potential near term which could push the economy even further beyond capacity. Core consumer price inflation has generally persisted below the Fed’s 2% objective for most of 2017. However, with indications that wage inflation is increasing in January at the fastest rate since June 2009, core consumer price inflation is expected to rise closer to this objective rate through 2018. The Fed opted to leave the fed funds unchanged at the current range of 1.25% to 1.50% at last month’s FOMC meeting though this followed a hike in December. The lack of a hike last month was more indicative of the Fed keeping the pace of tightening gradual in the face of below-target inflation rather than that of policy going on hold. With wage inflation starting to move up, we expect that the central bank will resume tightening at the next FOMC meeting in March. We expect the Fed to continue to tighten policy gradually going forward with 25 basis point hikes expected every quarter through the end of 2019. Such is premised on core consumer price inflation continuing to converge on the Fed’s 2% objective. Inflation rising beyond target will result in even greater tightening while inflation remaining under-target could see a slowing, and potential suspension, of Fed tightening.
