The Labor Department's robust November employment report leaves Federal Reserve officials on track to raise short-term interest rates next week but complicates their decisions on the pace of increases next year and beyond.
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The red-hot labor market could add to the case for picking up the pace of rate increases, coming on top of solid economic growth, rising stock prices and tax cuts on the horizon. But continued modest wage growth and low inflation could argue for continuing to move very gradually, or even more slowly.
Fed officials are likely to raise their benchmark short-term rate next week by a quarter-percentage point to a range between 1.25% and 1.5%.
In September, they penciled in three similar moves in 2018, two in 2019 and one in 2020. They will release updated projections on Wednesday.
"Weakness in wages is what catches the eye," said Michael Feroli, chief U.S. economist for JPMorgan Chase & Co., pointing to the 2.5% annual increase in average hourly earnings.
Mr. Feroli said he sees about even odds that Fed officials will move more aggressively and raise rates four times next year due to the economic boost to come from tax cuts.
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However, investor expectations for rate increases next year dipped slightly after the employment report was released, reflecting the tepid wage gains.
Fed-funds futures contracts, used by market participants to wager on the central bank's interest-rate moves, priced in just a 56.2% probability that the Fed will raise rates more than once by its November meeting next year, according to CME Group data. That was down from 58.9% a day earlier.
The robust labor market, frothy stock markets and expected boost from lower taxes would ordinarily bolster the case for a quicker pace of short-term interest-rate increases, to tamp down asset price growth and keep the economy from overheating.
Employers added 228,000 new jobs in November, and the unemployment rate held steady at 4.1% for the second straight month, the lowest level since December 2000, the Labor Department said Friday.
Revisions also showed hiring was stronger in September and October combined than reported earlier.
"What we're sitting and waiting for is some wage pressures," said Vassili Serebriakov, a currency strategist with Crédit Agricole.
Labor market gains have produced little acceleration in wage growth or inflation, underscoring a puzzle that complicates Fed policy decisions. The Fed targets 2% annual inflation but has undershot that goal for the best part of 5 1/2 years. Its preferred inflation gauge, the price index for personal-consumption expenditures, was 1.6% higher in October than one year earlier, and just 1.4% higher with volatile food and energy prices stripped out.
Annual wage gains were moderate in the year to November, according to Friday's payrolls report, and for some investors, that was enough to throw cold water on the prospect of a quicker pace of rate increases next year despite continued strength in the labor market and expected tax cuts.
Investors see a rate increase at next week's Fed policy meeting as a done deal, pricing in a 100% probability. They place the likelihood of at least one 2018 rate increase by the Fed's March 20-21 meeting at 56.5%. After that, traders assign just 34.2% probability to the Fed raising rates twice in 2018 by the June 12-13 meeting, and a 54.4% likelihood of at least two rate increases by September.
Market participants are "reaching a bit of a decision point" about the expected path of rates next year, said Aaron Kohli, a fixed-income strategist at BMO Capital Markets, adding that investors will be watching Wednesday's release of the November Consumer Price Index as closely as the Fed statement and projections.
In September, Fed officials expected unemployment would be higher by year's end, at 4.3% and fall to 4.1% by the end of next year. So at a minimum, their updated estimates will likely project a lower path for joblessness.
Officials could also indicate they expect stronger economic growth than they did in September. But they might not project more inflation given the wage picture.
Brad Bechtel, a currency strategist at Jefferies Group, said any changes to Fed officials' economic projections are more likely to come in the first quarter of next year than at Wednesday's meeting.
"I'm not sure they're going to rock the boat next week," he said, given the coming leadership transition at the Fed, with governor Jerome Powell nominated to succeed Chairwoman Janet Yellen when her term expires in early February.
Write to Harriet Torry at email@example.com
(END) Dow Jones Newswires
December 08, 2017 14:05 ET (19:05 GMT)