Chart of the week

Stagnant wages help keep interest rates low

Average annual earnings and effective federal funds rate

July 27, 2018 | 1 minute read
Average annual earnings and effective federal funds rate
  • U.S. economic growth surged in Q2 2018, with GDP nearly doubling its Q1 reading and reaching its highest quarterly growth rate in almost four years, according to data released on Friday.1 Markets increasingly expect the Fed to raise rates four times this year. The market-implied probability of four or more rate hikes in 2018 is now at over 60%, up from approximately 15% in late May.2
  • The chart highlights annual growth in average hourly earnings (wages), one factor that has helped drive monetary policy.3 While wages are up from the post-recession years, they have generally remained stagnant for the last two and a half years, which could potentially “cap” policymakers’ ability to raise rates over the long term.
  • Further underscoring the challenges that income-seeking investors could face in the years ahead, John Williams, President of the Federal Reserve Bank of New York, argued in a May Economic Letter that we “all need to plan for lower interest rates than [we’ve] experienced in decades past.”4 Williams notes that demographics, productivity growth and the demand for safe assets all point to a sustained environment of low interest rates.4
  • Given the recent economic spike, it’s important for investors to distinguish between the strong economic picture we see today and the drivers that underpin interest rate movements over the longer term. These factors continue to point to an environment in which interest rates remain low for the foreseeable future.

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