No one expects the US Federal Reserve to move interest rates at this week’s meeting. But, US inflation is “reviving, pressuring the Fed” says Macquarie research in its latest Global Macro Outlook.
That means that the Fed will be back with a rate hike in June which will then be followed up with a pace of rate hikes that “should prove to be, on average, 25 bps per quarter and occur until the Fed Funds rate reaches our forecasted terminal level of 2% late in 2017,” a team of analysts from across the globe wrote in the report.
Three more hikes this year would be a surprise to markets, according to the the CME Group Fedwatch calculator which shows that the market’s favoured view is one or no more interest rate hikes in 2016.
That sets up the chance for a hawkish shock this week from Fed forecasts, the dot plot, and potentially a more resolute Janet Yellen at her press conference.
But Macquarie has “comfort” in its more aggressive policy outlook because it says the slack in the labour market is disappearing.
“With the US economy only requiring somewhere between 55K and 100K jobs per month to keep pace with labour force growth, the current ~230K per month rate of jobs growth would likely cause full employment to be reached by 4Q16,” the report said.
They believe pace will slow into a “125K to 175K” range.
As the US labour market gets to full employment, “evidence of wage growth should become increasingly apparent,” Macquarie said. The analysts point out that retiring older workers being replaced with lower paid younger workers is artificially constraining wage growth.
Clearly the team at Macquarie agree with recent comments from Fed vice-chair Stanley Fischer who said he still believed the nexus between strong jobs growth and wages was intact.
“Accelerating wage growth should continue to put upward pressure on already firming measures of underlying inflation,” the bank said.
Here’s their chart:
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