Average hourly wages have jumped 5.1% year-on-year, according to the latest jobs report.
AP Photo/Nam Y. Huh
Surging wages could disrupt the Federal Reserve’s efforts to tame inflation, according to UBS.
Wage growth “is too high for the Fed’s liking and heading in the wrong direction,” the bank said Monday.
Average hourly earnings have climbed at the fastest month-on-month pace since January.
Accelerated wage increases will likely hinder the Federal Reserve’s fight against inflation and could lead to the central bank boosting interest rates more aggressively than the market currently expects, according to UBS.
Strategists at the Swiss bank said Monday that the November US jobs report — which showed average hourly wages climbing at the fastest monthly pace since January of 0.6% — showed wage pressures in the world’s largest economy still remain high.
That suggests the Fed will probably raise benchmark rates higher than 5%, the level that financial markets are currently pricing in as the likely peak in borrowing costs. The so-called fed funds rate is currently set in the 3.75% to 4% range.
“Friday’s jobs report indicated that the labor market remains tight,” a team led by UBS CIO Mark Haefele wrote in a note. “The 0.6% growth in average hourly earnings is too high for the Fed’s liking and heading in the wrong direction.”
The US central bank has raised interest rates by an outsized 75 basis points at each of the last four meetings in a bid to tame soaring prices, and will next review rates at a December 13-14 meeting.
UBS expects the Fed to slow the pace of its policy tightening, and predicts the institution to announce a 50-basis-point hike on December 14.
Higher wages tend to fuel inflation because they mean Americans have more disposable income, leading to a rise in spending. The most recent reading of US annual inflation came in at 7.7%, well above the central bank’s 2% target.
In a speech at the Brookings Institution last week, Fed chair Jerome Powell warned that wage growth remains “well above the levels that would be consistent with 2% inflation over time”.
“We appear to be heading for a situation where inflation is slowing from its peak, but is not on track to hit the 2% target because of rapid wage growth,” Haefele’s team said. “We think this could eventually end up forcing the Fed to raise rates beyond the 5% terminal rate currently priced into markets.”
“However, we still expect the Fed to moderate the pace of hikes to 50 basis points at the Federal Open Market Committee meeting on 14 December,” the strategists added.
UBS’s warning came after a stronger-than-expected jobs report weighed on stocks at the end of last week.
The US added 263,000 jobs in November, exceeding economists’ forecast for a gain of 200,000. That sparked a mixed finish to the week for equities, with the benchmark S&P 500 index sliding 0.12% Friday.
Read more: The US jobs market keeps beating the odds, adding another 263,000 jobs in November