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. Last Updated: 07/27/2016

New U.S. Data May Prompt Fed Action




WASHINGTON -- one-two punch from accelerating U.S. wage pressures and roaring economic growth, revealed in two key government reports Thursday, jolted financial markets fearing big interest-rate rises ahead.


With little evidence that the Federal Reserve's five quarter-percentage-point rate rises since last June were curbing growth and inflation risks, analysts cited a growing chance the U.S. central bank might move into higher gear.


The Labor Department said its Employment Cost Index, a broad gauge of what employers pay in wages, salaries and benefits, jumped 1.4 percent in the January-March quarter, building on a 1.0 percent rise in the last quarter of 1999 for its biggest quarterly gain in more than 10 years.


Separately, the Commerce Department said a consumer spending binge sped up and businesses invested heavily, driving the economy ahead at a continuing vigorous pace.


Gross domestic product, the value of all goods and services produced within U.S. borders, expanded at an annual rate of 5.4 percent in the first quarter. Though that was down from 7.3 percent in the fourth quarter last year, it remained far above levels at which the Fed considers the economy can grow safely without risking a flare-up in wages and prices.


In fact, a key price gauge in the GDP report that measures personal consumption expenditure rose at a 3.2 percent annual rate in the first quarter -the strongest quarterly increase since 3.5 percent in the third quarter of 1994.


Both sets of figures sent shivers through world financial markets where many investors had already wondered whether the Fed will adopt a more aggressive strategy, possibly hiking rates by a half percentage point.


"Instead of jabs, the Fed may have to go with a sharp upper cut," warned economist Oscar Gonzalez of John Hancock Financial Services Inc. in Boston.


Inflation-sensitive U.S. Treasury bond prices suffered, while share prices were again volatile. The Dow Jones industrial average, off nearly 200 points part way through the trading session, rallied to close down 57.40 points at 10,888.10.


Investors shifted money to high tech-oriented companies that trade on the Nasdaq composite index, which gained 143.96 points to end at 3,774.05, on hopes these firms will benefit from heavy investment in new computers and other equipment.


The quarterly ECI index, closely watched by Fed Chairman Alan Greenspan, was particularly shocking since it appeared to confirm Greenspan's past warnings that tight labor markets inevitably lead to a sharp climb in compensation.


Some analysts thought the report could nudge the Fed toward moving more aggressively at its May 16 policy meeting.


"ECI paves the way for more aggressive Fed action," said Tim Horan, director of international fixed income at Lord Abbett and Co. in New York.


The Labor Department's report said higher benefit costs again were the key factor driving up the overall ECI.


Year-on-year, pay and benefits shot up by 4.3 percent, the biggest gain since December 1991 and outpacing the overall rate of U.S. inflation at 3.7 percent.


While the first-quarter GDP performance was weaker than the 5.9 percent growth forecast by Wall Street economists, it featured the strongest consumer spending since 1983 and robust business investment that implied optimism about growth ahead.