Will the Fed fall behind the curve?

Yesterday's FOMC meeting surprised with a more dovish message than expected with focus on global growth risks and a downgrade of the inflation forecast.The labour market also got some attention as Janet Yellen made clear that, even though the unemployment rate is now close to the long-term unemployment rate (NAIRU) target, the FOMC thinks it understates the amount of slack.

It sees support for this in the wage developments where the rise in hourly earnings is still quite subdued. This means that wage developments will be key in judging when the slack is used up. It is interesting to compare this development with the situation in the UK. In many ways the US and UK economies have moved in a similar fashion over the past years and both countries now have unemployment around NAIRU.

UK wage growth has picked up sharply over the past year from below 1% to currently 2.9%. It is not unusual that once unemployment moves below NAIRU there is a clear acceleration in wage growth. The development in the US might follow the same pattern.

It is also useful to look at other indicators of wage pressure in the US. These also clearly suggest that the US may not be far away from acceleration in wage increases. The job openings rate is the highest in a very long time and jobs are more plentiful. Small businesses report of vacancies and the temporary help service rate is also at a high level.

"Our wage pressure indicator suggests that the trend in the growth of the Employment Cost Index will soon resume higher following a small setback in Q2. With unemployment continuing lower it will make it more challenging for the Fed to continue to see slack left in the labour market. Sooner or later wage growth will pick up more strongly leaving the Fed with less flexibility to revise down the NAIRU and delay hikes", says Danske Bank.