Economics

Schroders Quickview: US edges closer to June rate rise

Another strong jobs report in the US puts a June interest rate rise back on the agenda for the Federal Reserve.

06/02/2015

Keith Wade

Keith Wade

Chief Economist & Strategist

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The latest employment report showed that the US economy created 257k jobs in January, slightly above expectations, but the real story was the revision of the last two months’ figures. Job gains in November and December were revised upward to 423k and 329k respectively, some 147k higher than originally estimated. The unemployment rate rose slightly to 5.7% as the participation rate rose, but we also saw a bounce back in wage growth with average hourly earnings rising 0.5% month-on-month to 2.2% year-on-year. This measure is now in line with the reading from the broader Employment Cost index, which is showing a clear pickup in wage and salary gains.

 

It is clear that the US economy is beginning to generate some inflationary pressure of its own.

The Federal Reserve could choose to focus on the fall in headline inflation and fret about weakness in the eurozone and China, but it is clear that the US economy is beginning to generate some inflationary pressure of its own. Unit wage costs, the broadest measure of cost pressure, picked up in the final quarter of last year as wages rose and productivity growth slowed.

Markets have subsequently increased the probability on a June rate rise to 25%, up from just 13% last week. We still see this as too low and would put the probability at closer to 60%. The next key date will be Janet Yellen’s testimony to Congress on the state of the economy which is expected in two weeks’ time. Today’s report will have nudged her a little closer toward a June move.