Latest wages figures push a first US interest rate cut further down the road

A further piece of ‘hot’ data from the US today, this time in the form of the Employment Cost Index (ECI), the Fed’s preferred measure of the strength of wages growth. Landing on what is the first day of the FOMC’s two-day policy meeting, today’s number is the latest in a string of economic releases that are increasingly pointing to inflationary pressures starting to accelerate again, following the progress that was made in bringing CPI lower last year. Both wages/salaries and benefit costs rose by 1.2% over Q1, up from 0.9% in Q4, although unfavourable rounding effects look to have tipped the reading from 1.1% to 1.2%. But nevertheless, it is still a disappointing figure as far as the FOMC is concerned and very much sets the stage now for what could be a relatively hawkish FOMC meeting and accompanying press conference tomorrow.

Today’s number suggests employment costs are rising at a rate of 4.8% on an annualized basis, up from 3.6% in Q4. On a year-on-year basis, costs are rising by 4.2%, suggesting a degree of persistency is now starting to infect wage inflation. Benefits, annualized, rose by 4.5% compared to 3.0% in Q4. Interestingly, the Q1 figure has again printed more strongly that that suggested by the immediate trend, suggesting a degree of seasonality is being exhibited in the numbers. But this aside, progress on bringing down employment costs is slowing, and even though the falling Quits rate continues to point to lower wages costs going forward, the Fed will need to respond to the current picture, effectively pushing a first interest rate cut further down the road.

For the Fed to be able to cut interest rates even as soon as September, it would likely now need to see a large rollover in the payrolls numbers to be published between now and then, plus similarly large falls in the various inflation metrics that will be published. While possible, it is unlikely such outturns will be seen – if anything, the risk is that we see a continued run of the stronger numbers seen so far over Q1. Accordingly, the prospect of an interest rate cut being delivered before September looks to be virtually nil. And with the FOMC now likely to want a longer run of softer inflation/wages numbers before being confident that inflationary pressures are definitively moving lower again, it is probably most prudent at this stage to not expect any cut until at least November.