Watch for rising US wage growth – and more Fed hikes

Why US interest rates could go up faster than expected

Markets in February hit a rough patch when stocks tumbled and bond yields soared after strong US wage growth data fuelled speculation that the Federal Reserve would hike interest rates more aggressively than expected.

We may not be out of the woods just yet.

The strong US economy, easy financial conditions, fiscal stimulus and recent wage and inflation data all point to more monetary policy tightening from the Fed. For this reason, we have added a fourth interest rate hike to our Fed forecast for 2018. And the risks are clearly tilted to the upside.

In a new analysis, our analysts take a deep dive into the famous Phillips curve – the relationship between wages and unemployment. Based on the model, when unemployment goes down, wage growth and thus inflation should go up.

Yet wage growth has been lagging, given the official unemployment rate, leading to rumours that the Phillips curve is dead.

However, the Fed believes in the Phillips curve – and so do we. Using the broader measure of unemployment, known as “U6”, we find that the Phillips curve still holds and points to accelerating wages.

With the US labour market set to strengthen further, there’s good reason to believe wage growth will pick up, adding upside risk to our Fed call of four rate hikes this year and three more next year.

Markets already experienced a mini US wage scare in early 2018 and could face more volatility ahead.

Read the Phillips curve analysis, US: Watch for rising wage growth.

Read about our updated Fed forecast.

Don’t miss the podcast in which analysts Jan Von Gerich, Kjetil Olsen and Anders Svendsen discuss the Fed outlook and the risk of rising wage growth and inflation in the US.

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