The Fed now has everything it needs to raise rates in December
The Federal Reserve has the final clearance it needs to raise rates in December.
On Wednesday, its policy statement said it was waiting for "some further evidence of continued progress toward its objectives."
On Friday, the Fed got more of the evidence it wanted.
The jobs report showed that wages grew at the fastest pace since the recession. Year-over-year, average hourly earnings rose 2.8%, the most since 2009.
This upturn in wages is more evidence that inflation is building. When consumers have more to spend, their demand for goods increases. Also, companies may respond to higher labor costs by raising prices. Both of these things put upward pressure on inflation.
The Fed's preferred inflation measure, core personal consumption expenditures (PCE), has risen from 1.38% year-over-year growth in December 2015 to 1.70% in September, the most recent reading. In its statement, the Fed said inflation "increased somewhat," updated from language that dwelt only on the fact that PCE was still below 2%.
Also, the unemployment rate fell to 4.9% while labor force participation remained little changed. But even the broader U6 unemployment rate, which includes workers who are part-time only for economic reasons, fell by 0.2% to 9.5%.
"That is significant for a Fed that has been buying time based on a view there is more slack than is evident in the U3 [4.9%] number," said Alan Ruskin, global head of G10 FX strategy at Deutsche Bank, in a note.
"All in all, the data fits perfectly with a Fed hike in December, and does nothing to detract from a view that the market has underpriced Fed tightening risks for 2017."
Last Friday, the Fed also got good news on the economy. The advance estimate of third-quarter gross domestic product showed that the economy grew at an annualized rate of 2.9%, the fastest rate in two years.
"A December hike is not a done deal, however," said BNP Paribas' US economics team in a note. "A key uncertainty is next week's US Presidential election and financial markets' reaction to the outcome."