Federal Reserve Chair Janet Yellen testifies on Capitol Hill in Washington before the House Financial Services Committee hearing on U.S. monetary policy.
"Donald Trump's Shifting Words On Janet Yellen And Interest Rates"
With Record Income Gains, What Excuse Will The Fed Use Now?
Jeffrey Dorfman
Forbes
Today the Census Bureau issued its major annual report on incomes and poverty in America. The big highlight was a reported 5.2% gain in median household income after inflation, the largest gain in more than a generation. Given unemployment under 5% and strong income gains reported across pretty much every category, it is hard to see any justification for the Federal Reserve to delay a second rate hike beyond their meeting next week. However, I expect they will think of something to use as an excuse not to raise interest rates.
The Census report shows the gains in earnings were spread widely over the entire population. Inflation-adjusted median household income rose for every racial subcategory, for married families, for single moms, single dads, and for both single men and women. Incomes rose for people of all ages, with the smallest gain being a solid 3.5% for people aged 55-64. Incomes also rose for every geographical region.
Big cities showed stronger gains than smaller ones. About the only blot on an otherwise best-case report was a 2% drop in median income for people that live in the most rural areas, not in any metropolitan statistical area. However, income gains were shared by both native and foreign born, with non-citizens, in fact, experiencing the largest median income gains of any category. Overall, the median household income gains suggest significant strength in the labor market, with income gains coming both from wages growing faster than inflation and from more people per household working.
Further proof of the strength of the labor market is found deeper in the Census report. While everyone is focused on the boost in median household income, inflation-adjusted incomes rose at every percentile of the income distribution in the report, with the biggest gains for those with the lowest incomes. A person at the bottom 10% of the income distribution (somebody making more money than only 10% of people in the country and less than 90% ), saw his income rise almost 8%. A person at the 20th percentile saw a gain of over 6%.
Middle earners saw incomes rise 5% faster than inflation. Those at the 80% mark saw about a 4% gain, and somebody in the top 10% of income earners saw about a 3% gain in real income. Income gains were spread equitably across all income levels with bigger gains for those nearer the bottom. Nobody can say the poor or middle class are being left behind.
The Census report also provides proof that the gains are not just from more people getting jobs, nor are the gains from people moving from part-time to full-time work. The Census conveniently provides the Fed (and us) with a table showing gains specifically for people who worked full-time in both 2014 and 2015. This part of the report shows that men working full-time saw their earnings rise 1.5% above inflation and women working full-time earned 2.7% more after inflation.
These are largest pay gains for full-time workers since 2007, just before the most recent recession. In fact, these gains are not just larger than the average pay gain for full-time workers over the past thirty years, but actually larger than the average gain for full-time workers if you take the average only of years where earnings gains were positive. That is, if we eliminate all recession years and even non-recession years where full-time worker’s did not see pay gains, this year’s gains still are above the average. There is just no way to look at these numbers other than to say the workers finally have the upper hand in the job market, forcing employers to pay them more. Wage and earning gains in 2015 were historically strong and robust across the economy no matter which way you slice the population.
All the evidence says that the labor market is finally showing sufficient tightness for wage growth to take firm root. Thus, it seems clear that the Fed’s excuses for delaying the necessary rate hikes to restore the economy to a more normal capital allocation footing and to give the Fed room to maneuver when the next recession arrives are no longer valid. The lowest interest rates in history paired with some of the largest wage gains make no sense from an economic policy point of view.
Personally, I believe the Fed is looking for any excuse to avoid rate hikes, especially between now and election day in November. I expect them not to approve a rate hike next week. However, they have no excuse to wait further.The labor market is flashing RATE HIKE NOW in big bold letters for anybody willing to read the signs.
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