Even uber-doves are now looking over their shoulder.
There have been all kinds of carefully phrased semi-hawkish statements emanating from carefully contained semi-hawkish Fed governors recently. Today, Dallas Fed President Robert Kaplan repeated what he has been saying for a while - that the "base case" should be three rate hikes this year, and that there could be four, warning, "if we wait to see actual inflation, we'll be too late."
But it's the most fervent "doves" - when they start getting cold feet as doves - that matter the most when it comes to tightening monetary policy.
One of the most persistent, most vocal doves on the policy setting FOMC has been Minneapolis Fed President Neel Kashkari. He voted against all three rate hikes in 2017, and was vocal about why he did: inflation was too "low."
He also does not see the asset bubbles all around us, not even the housing bubble, though other Fed governors have fretted about them. He claimed in an essay that "spotting bubbles is hard," that even if the Fed could see them, it shouldn't do anything to stop them because it had only "limited policy tools," and because "the costs of making policy mistakes can be very high."
That's the kind of fervent dove he is. But today, he started looking over his shoulder.
There was a number in the jobs report this morning that got his attention: average hourly earnings in January gained 2.9% year over year, the largest gain since June 2009... hallelujah, finally! Pressures are building up in parts of the economy, and companies are griping they cannot hire enough workers in some professions - or that they would have to pay more, God forbid, to hire them.
Pay increases at the bottom of the wage scale, where they have been sorely lacking, had a lot to do with it: in 18 states and in numerous cities, minimum wages increased on January 1. This also caused spillover effects on wages a few notches up the scale. According to the Economic Policy Institute, these new minimum wages, not counting the spillover effects, have raised the incomes of 4.5 million workers all at once on January 1.
"The most important thing that I saw in a quick review of the jobs data is wage growth," Kashkari told CNBC on Friday.
"We've been waiting for wage growth. Everyone has been declaring that we're at maximum employment. More Americans have been coming in, which is a really good thing. But there hasn't been much wage growth. This is one of the first signs that we're seeing wage growth finally starting to pick up. That's good for the public as a whole. I think it's good for the economy overall. But I do think if wage growth continues, that could have an effect on the path of interest rates."
The path of these interest rates is already winding uphill. For now, everyone at the Fed, when they advocate for higher rates, keeps repeating the qualifier, "gradual." But so far, Kashkari has used every opportunity to vote and speak out against any and all rate hikes.
Yet, the moment wages tick up, suddenly it gets his attention. It gets every Fed governor's attention. Wage increases give them the willies.
Creating asset price inflation, including the most glorious housing bubble imaginable, became the Fed's publicly stated policy goal under Chairman Bernanke - his infamous "wealth effect" doctrine. And consumer price inflation must always be high enough to eat up wage gains and help companies show growing revenues, but not so high that it blows down the whole house.
But wage inflation is toxic for the Fed. Wage inflation means that people get paid more for the same amount of work. A higher income due to promotions, for example, is not part of wage inflation.
So Kashkari explained to CNBC why he voted against every rate hike last year:
"We've been undershooting our inflation target for basically 10 years. And there has been very muted wage growth." So to "assess supply and demand in the labor market," you "start by looking at the price. And the price of labor - wages - had not been climbing. This jobs report now at least shows some signs of wages picking up."
While "there might still be some slack in the labor market," he said, "the wage measure is really important."
In its statement after the January 31 meeting, the Fed specifically pointed at the "low" unemployment rate, and some Fed governors have said that the unemployment rate, at 4.1% for the past four months, might inch down to 3.9% by the end of the year and stay there in 2019, and that these levels would put further pressure on wages, as employers might have to raise wages to attract workers.
When wage inflation picks up, the Fed steps on the brakes. Even Kashkari. While he rotated into a non-voting slot at the FOMC this year, he will be just as active during the discussions and in his public appearances. But now, even the most fervent dove is watching wage inflation with a worried eye. And if wage inflation continues to rise, expect some fireworks.
The QE unwind is now in full swing, with a sense of urgency. No more dilly-dallying around. Read... "Fed's QE Unwind Accelerates Sharply."