Is a Rate Hike On Deck?

It’s become very popular in recent weeks and months to argue that there’s building wage pressure and that this means inflation will pick up which means that the Fed has to start thinking about getting ahead of the curve here with rate hikes.

It’s true that there’s some growing wage pressures, but let’s also keep things in perspective.  When reviewing this I find it helpful to go to the source of the actual wage pressures – businesses.  And the recent NFIB small business survey provides us with a pretty nice picture of what’s going on.  As you can see in the chart below there is a very clear upward trend in compensation.  But we’re also currently at levels that are consistent with previous recessions.

So yes, there are growing wage pressures just as should be expected this deep into a recovery.  But this is not your normal recovery.  We’re crawling out of a particularly deep hole and the strength of this recovery is extremely tepid. With weak credit growth, declining commodity prices, weak foreign/domestic growth and only tepid wage pressure I think we could easily be having a discussion about deflation again sooner than some people think.

So, is a rate hike in the cards?  I think it would be extremely misguided for the Fed to raise rates in an environment as weak as the current one.  It would not only send the wrong message to markets, but it would potentially snuff out any growth in credit we’ve started to see.  If the Fed is worried about financial markets and disruptions via the QE channels then they should continue their measured unwinding of the program.  But rate hikes are a whole different story.  And I fear, if they start raising rates we’ll likely be having a discussion not too long after about when to cut them (after the US economy sinks into a recession).