Recent signs of economic strength, together with a pair of key departures from the Federal Reserve Board, may have shortened the odds on an interest rate hike by the central bank.
"The chances are better than many people may think, probably about 50- 50," for a rate increase when the Fed's monetary policymakers meet in two weeks, said Robert A. Brusca, chief economist at Nikko Securities Co., New York.
"The Fed has to be concerned about some of the trends it sees," he said. In particular, recent job market data "point to nothing but growth, more growth, and maybe some more inflation."
A newer member of the Fed's board of governors, Laurence H. Meyer, appeared to express concern during an interview last Thursday. He cautioned that the Fed must avoid "complacency" about incipient inflation.
Meanwhile Janet L. Yellen and Lawrence B. Lindsey are set to leave. Both have been "among the more moderate voices" on monetary policy, said Mr. Brusca, and their departures thus probably move the Fed "a step closer" to hiking rates.
Fed Chairman Alan Greenspan, who deflected rate hike pressure brought by district Fed bank presidents at several open market committee meetings last summer, according to the Fed's own minutes, now will face similar pressures without his previous allies.
Mr. Greenspan himself has offered few clues recently about his views on yearend economic developments. The committee next meets Feb. 3-4.
Another economist, Jonathan Basile of HSBC Markets, New York, put the probability of a February rate hike at 55% to 45%. "The interest rate debate is back with a vengeance," he said.
The reason is not the higher-than-expected 262,000 increase in nonfarm payrolls in December. If the atypical 31,000 rise in government payrolls last month were excluded, job growth was not higher than expected, he said.
The focus of the debate is the six-cent jump in hourly earnings, coming after a nine-cent rise in November. "After having stabilized over the summer in a 3%-3.5% range, the year-over-year rate of earnings growth has now hit 3.8%, a six-year high," he said.
The November and December increases may be linked to the October increase in the minimum wage, Mr. Basile said.
"January's data will be the acid test," he said. "If earnings jump again, it will be hard to argue that the minimum wage is the cause. The balance will then swing, and rates will rise."
But labor market trends are not the only issue likely to get major scrutiny by the central bank, he said.
"It is becoming harder to discount completely the idea that the Fed may be forced into action by the sustained increase in energy prices over the past few months," the economist said.
"With no end in sight to the pressure from low inventories, cold weather, and supply uncertainties, the divergence between headline and core inflation is set to widen further," he said.
Economists refer to the raw consumer price index reported monthly by the Bureau of Labor Statistics as the "headline" inflation number. The "core" inflation number excludes food and energy price movements, which are viewed as more volatile than other prices.
The Fed may be worried that energy-related price increases at the producer level will soon emerge in the headline CPI. "This stage has not been reached yet," Mr. Basile said, "but it may not be far off."
