US wage growth is higher than any time since 2009. This has led to speculation that Jerome Powell, the new Federal Reserve chair, would be forced to raise US interest rates by more than three times. Three interest rate hikes were forecast by the central bank for this year, but that may now be increased by at least one.
Rising Inflation Necessitates Interest Rate Hikes
The three interest rate increases were forecast as being necessary to combat rising inflation. However, the rate of nonfarm payroll increases to 200,000 was 20,000 more than the forecast 180,000. Unemployment is remaining at an unchanged 4.1%. In addition to that, the increase in wages in January came to an annualized rate of 2.9% the highest rate since April 2009.
Bond Yields Rising
Bond yields had been rising steeply, and in January they rose even higher. Interest rates increased as more stock futures were sold off. In fact, the benchmark 10-year rate for interest rates reached 2.84%. Market expectations are getting close to the requirement for three interest rate increases by December. If the US wage growth keeps rising, then three rate hikes may not be sufficient.
Rising Bond Market Driven by Wage Increases
It seems certain that the bond market is being driven by the wage increases. That being the case, a close watch will be kept on wage increases over the coming months. If wages continue to increase then a fourth interest rate hike may almost certainly be on the cards. There are certainly signs that wages will continue to rise, which will, in turn, lead to increases in bond yields due to a consequent likely interest rate increase.
US Wage Growth May Lead to Inflation
This apparently inexorable increase in US wage growth could be an indication of coming inflation. Others believe it to be a healthy indication that the labor market is becoming healthy again. After news of the wage growth was released, the 10-year Treasury yield increased to 2.85 percent Friday. Bond rates move in the opposite direction to stocks, so when bonds rise, stocks go down. Those in the know are sure that there will be more than just three rates rises this year to counter this.
