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Net Net: Promoting innovation and managing change

Janet Yellen just got some pretty bad news

Economic growth slows
Economic growth slows

Two days after the Federal Reserve released what was allegedly its most hawkish statement in months came a reminder that the path toward a rate hike won't be an easy one.

One of the main economic factors for Fed officials when it comes to assessing the right time to start hiking rates is wage growth, tied with the consumer spending that is supposed to follow. There was bad news on both fronts in economic data released Friday morning.

The big releases of the day were on personal income, which increased just 0.1 percent in September, missing even the meager consensus estimate of 0.2 percent, and the University of Michigan consumer confidence survey, which, at 90, whiffed as well with its second-lowest reading of the year.

Below the Wall Street radar, though, came another report that doesn't garner the headlines but is believed to be one watched closely by Fed Chair Janet Yellen and her fellow monetary policymakers: The employment cost index.

Janet Yellen
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The quarterly release from the Bureau of Labor Statistics showed that compensation costs for nongovernment workers rose just 0.6 percent in the three-month period — about what economists had expected but not much to move the inflation needle. On an annualized basis, compensation costs rose just 2 percent, which actually is a decline from the 2.2 percent increase realized for the same period a year ago. Benefit costs increased just 1.4 percent, despite a 3 percent jump in health-care packages.

Read MoreConsumer spending sees smallest rise in 8 months

The news was slightly better for state and local government workers, who collectively saw a 2.3 percent annualized increase, compared with 1.8 percent in the year-ago period.

The pace of wage increases is critical to Fed thinking. Many on Wall Street took Wednesday's statement, which referenced conditions for an interest rate increase by the end of the year, as indicating that central bank officials are close to hiking for the first time since taking their key policy rate to near-zero in late 2008.

Federal Open Market Committee members are hoping to see demand-driven inflation, something hard to come by when wage increases are so anemic. The wage and confidence news comes just a day after the government reported gross domestic product growth of just 1.5 percent in the third quarter.

With the slow wage growth, core inflation as measured through Yellen's preferred indicator, the personal consumption expenditures index, is tracking at just 1.25 percent, according to Steve Blitz, chief economist at ITG.

Read More Why the market is misreading the Fed decision

"The FOMC, if true they are tied to trends, can only be disappointed by the trend in consumption and wage growth coming out of the third quarter," Blitz said in a note. "Because [if] they really, really, really want to move 25 basis points in December they have to be, by their own rules, now focused on whether the individual data points for the economy in the next six weeks indicate a change in trends to the upside. In other words, the next two payroll numbers mean everything."

Economists currently expect next Friday's nonfarm payrolls report to show a gain of 180,000 for October, which despite being below trend would indicate an improvement from September's 142,000 gain.

For Fed officials, though, their eyes more likely will be glued to average earnings data, which last month actually edged lower and now show a 2.2 percent annualized gain. If wage pressures remain muted, the Fed likely will be inclined to hold off on a hike, despite Wall Street's interpretation that the post-meeting statement Wednesday indicated a desire to move at the December meeting.

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"With the labor market approaching full employment, we still anticipate that rising wage growth and underlying inflation will be the big surprise next year, eventually forcing the Fed to hike interest rates more aggressively," Paul Ashworth, chief U.S. economist at Capital Economics, said in a note. "But that clearly hasn't happened yet, which is why the first rate hike is probably going to be delayed until early next year."

Fed futures currently are pricing in a 50 percent chance of a hike in December and a 59 percent probability of a January move.