Nothing will get Fed hiking faster than pickup in wages in March

Now that the Federal Reserve has put an increase in interest rates on the table of its June meeting, what will get them to actually pull the trigger before the 4th of July?

The short answer: a pickup in average hourly earnings.

“We remain of the view that nothing would drive U.S. policy rates higher more quickly than clear evidence of faster wage gains,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

Economists at Jefferies agreed: “As a reflection of the price of labor, we think that the behavior of [average hourly earnings] may be the single most important barometer of the state of the labor market normalization process and labor market slack.”

For the Fed, faster wage growth is a harbinger of higher inflation.

Over the 12 months ending in February, average hourly earnings are up 2%, showing no sign of sustained growth over the past few years. The March unemployment data to be released at 8:30 a.m. on Friday.

Economists are expecting a 0.2% gain in average hourly earnings in March, in line with recent trends.

But monthly readings of average hourly earnings tends to be volatile, noted Jim O’Sullivan, chief U.S. economist at High Frequency Economics.

Fed Chairwoman Janet Yellen said in a speech last week that the Fed thinks wages will eventually run much higher than 2%.

The March job data is not make-or-break for the U.S. central bank. The Fed will be able to look at data for April and May before its policy meeting on June 16-17.

Richmond Fed President Jeffrey Lacker noted in a speech this week that another measure of wages, the employment cost index, increased at a 2.8% annual rate over the last three quarters of 2014.

“My own view is that a stronger labor market is bound to lead to stronger wage and salary growth, if it hasn’t done so already,” Lacker, a hawk of the Fed who supports a June move. The employment cost index for the first quarter will be released on April 30.

Overall, analysts are expecting job growth to slow a bit in March to 243,000 from a red-hot pace of 295,000 in February. The unemployment rate is expected to hold steady at 5.5%.

O’Sullivan said the Fed would look past an unexpectedly weak report in March, noting that jobless claims continue to signal a solid labor market.

Stuart Hoffman, chief economist for PNC Financial Services Group, said in order for the Fed to hike in June, job gains over the next three months will have to be above a 200,000-250,000 range and the unemployment rate will have to drop 5.2%.

That would put the unemployment rate inside the Fed’s new estimate for how low the jobless rate can go without sparking higher inflation.

Hoffman said he thinks the Fed will hold off until the third quarter to get a better read on the gross domestic product data.

Economist expect growth to be weak in the first quarter but snap back in the April-June quarter