August's surprise jump in wages could be a sign of more wage growth ahead — good news for workers and a green light for the Fed when it comes to interest rates hikes.
The workforce expanded by 201,000 in August, 10,000 more than expected, but the big surprise in Friday's report was the 0.4 percent increase in average hourly wages, double what was expected on a monthly basis. Helped by revisions in June and July data, wages grew at a 2.9 percent annual pace last month.
"There is no longer a mystery about why companies are not rewarding their employees after one of the biggest tax cuts in history. Fed policymakers can cross that worry off their list. This economy has moved beyond full employment," said Chris Rupkey, chief financial economist at MUFG Union Bank.
Treasury yields rose, the dollar gained, and stocks fell as traders bet the solid wage data means the Fed will be more motivated to push up interest rates. The 2-year Treasury yield rose to 2.70 percent, its highest level in 10 years, while the Dow lost as much as 107 points.
The Fed is expected to raise rates at the end of this month and in December, but some market pros have been skeptical about the December hike.
"The market's pricing in slightly higher odds, but that's consistent with what you would expect," said Ian Lyngen, head of U.S. rate strategy at BMO. "My interpretation is the risks to the Fed were to the downside in terms of what they could or could not do. This gives them more than enough space to keep their gradual rate hikes in place. If we got a bad number on wages, there would be mounting evidence that they might want to reassess their tightening ambition."