Since 1985 the Fed has usually started to raise rates once real or inflation-adjusted wage growth topped 2.5%, according to research by Capital Economics. And annual wage growth has typically accelerated to 2.5% or higher when the unemployment rate fell below 7%.
As of February, the U.S. unemployment rate stood at 6.7%, and it’s been on a downward arc for the past year. Meanwhile the annual growth in wages of nonsupervisory workers — those not in management — rose to a three-year high of 2.5% last month from 2.3% in January.
In most scenarios, the Fed already would have raised the fed funds rate — now effectively at zero — to head off any threat of inflation or the economy overheating. So does that mean the central bank will raise rates a lot sooner than the end of 2015?
Maybe, but it’s by no means certain. The increase in real wages over the past few months could just be a temporary spike, for one thing. And the U.S. economy still isn’t close to running on all cylinders, a situation that suggest the bank could wait a lot longer than it normally does to see how much wages will increase.
“The Fed’s current plan to leave interest rates on hold until late 2015 despite expecting the unemployment rate to fall further and inflation to gradually rise back to 2% shows that it is being much more cautious about raising interest rates,” noted Paul Dales, chief U.S. economist at Capital Economics.
Still, Dales thinks the Fed will have to act a “bit faster than most people expect.” If so, the bank might drop some clues on Wednesday after its latest policy-setting meeting and the first news conference by new Chairwoman Janet Yellen