Traders see more US rate hikes in 2017 after wage data

Reuters: Traders on Friday expected the Federal Reserve would raise US interest rates further in 2017 following data that showed a pickup in wage growth in December, reinforcing the notion inflation is closing in on the Fed’s 2% goal.

Several Fed officials on Friday spoke of possibly a faster pace of rate increases with Chicago Fed President Charles Evans saying three hikes this year are “not going to be implausible.”

Average hourly earnings rose 0.4% last month, reversing from a 0.1% fall in November. That brought the year-over-year rise in earnings to 2.9%, the biggest increase since June 2009, government data showed.

The surprisingly strong spike in hourly wages was muted by a weaker-than-forecast 156,000 rise in nonfarm payrolls.

“We have been waiting for wage growth. We are finally seeing it,” said Jeffrey Cleveland, chief economist at Payden & Rygel in Los Angeles.

Interest rates futures implied traders see a 69% chance the US central bank will increase the target range on short-term borrowing costs to at least 0.75-1.00% at its June 13-14 policy meeting. That compared with a 62% chance on Thursday, according to CME Group’s FedWatch program.

The futures also implied traders see a 73% chance the Fed will raise its target range to at least 1.00-1.25% at its December 12-13 meeting, up from 67% on Thursday, the CME FedWatch program showed.

The overall solid jobs report came after the Fed this week released minutes on its December 13-14 meeting where it raised interest rates by a quarter point due to an improving job market and expectations of rising inflation.

Fed policymakers thought the economic expansion could accelerate from the possible tax cuts, federal spending and looser regulations President-elect Donald Trump and a Republican-controlled Congress have pledged to implement.

A livelier US economy would allow the Fed to normalise interest rates as it seeks to raise them further from the emergency low levels it adopted during the global credit crisis in December 2008.

The December jobs report was not strong enough to change the view that the Fed would only raise rates twice in 2017, analysts said.

Investors and the Fed are awaiting for details on fiscal stimuli from Trump and Republican lawmakers to evaluate their boost to business activity and the overall economy.

“It doesn’t mean the Fed is behind the curve and they have to raise rates faster,” Cleveland said.