Hidden job market strength justifies the US Federal Reserve raising interest rates twice this year to curb inflation pressures, Toronto-Dominion Bank (TD) chief economist Beata Caranci said.
Wages in states like New York and Massachusetts are rising at about a 3 percent pace as employers seek out higher-skilled workers, Caranci said on Friday.
That is in contrast to the last jobs report where wages fell on a monthly basis for the first time since December 2014, and the 12-month pace of 2.2 percent lagged a Bloomberg survey calling for 2.5 percent.
“On more of a regional basis you can see more of what’s happening,” said Caranci, who was head of Toronto-Dominion’s US and international economics group until her promotion last year.
“Your oil-producing states are depressing the wage movement as well as some of the manufacturing base, but where you have high-skill workers you are elevating it,” she said. “It speaks to some of the capacity pressures that are getting eaten up more in the US.”
Caranci’s Fed forecast is in line with the average estimate of 70 analysts surveyed by Bloomberg who see the federal fund’s target rate at 1 percent by the fourth quarter.
The Federal Open Market Committee is scheduled to publish its next policy statement at 2pm tomorrow from Washington, together with updated quarterly economist forecasts and projections of the expected path of policy.
US Federal Reserve Chair Janet Yellen is expected to hold a press conference at 2:30pm.
Investors have been too pessimistic about the potential drags on US growth from a stronger US dollar and signs of global weakness, Caranci said. US core inflation has held up even as the currency’s strength could have dented price gains, she said. The core index advance of 2.2 percent in January from a year earlier was the strongest since June 2012.
“Two hikes, 50 basis points, is completely reasonable because we think that you have significantly less slack in the US economy than people are expecting,” Caranci said.
Canada’s central bank is unlikely to raise rates until 2018 as exports and investment are expected to be slow to rebuild following a plunge in commodity prices such as oil and fiscal stimulus takes a while to kick in, Caranci said.
Bank of Canada Governor Stephen Poloz kept his target lending rate at 0.5 percent last week.
The economy is not expected to get much help this year from stimulus in a budget Canadian Prime Minister Justin Trudeau is set to deliver on March 22, she said. The government has signaled a deficit might reach C$30 billion (US$22.62 billion), money that will not get into the economy fast enough to lift growth this year, she said. The boost to GDP for next year is to be about 0.3 percentage point unless there are surprise stimulus measures, she said.
“It’s really not going to be a huge game changer for Canada, but it certainly would lend a helping hand,” she said.
One area set to cool is Canada’s housing market, Caranci said.
Toronto-Dominion has the most pessimistic call for housing starts in a monthly Bloomberg News economist survey published on Friday, saying the pace is set to fall to 161,000 next year from 181,000 this year.
Obstacles include record consumer debt burdens and tougher mortgage regulations, Caranci said.
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