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The Fed will hike rates but it won't hurt your paycheck: Zandi

Joanna Campione

Another blockbuster jobs report for the month of January with some pretty big upward revisions for the months of November and December.  Crunch the numbers, and it was the biggest three-month gain in jobs in 17 years. 

Moody's Analytics' Chief Economist Mark Zandi says January's jobs report is encouraging; he's been bullish on jobs for more than a year. As someone who crunches numbers for a living, Zandi made the call last year that America would return to full employment by the end of 2016. Full employment is when all, or nearly all, Americans who are willing and able to work are doing so. But now, Zandi tells Yahoo Finance Editor-in-Chief Aaron Task that he thinks we'll get there even sooner. “Given the improvement in job growth, it’s probably going to be more like summer of 2016,” says Zandi. “Another 18 months from now and that’ll feel pretty good.” It’s been almost a decade since the U.S. economy has been at full employment.

Wage growth is also a big part of the equation in this jobs recovery.  And wage growth in January was particularly encouraging after a surprise decline last month. Average hourly earnings jumped .05%, to $24.75, the strongest since November of 2008. That means year-over-year, wages are now up 2.2%. Zandi says expect more of that.  “As the economy does approach full employment,” Zandi says, “as unemployment and underemployment gets absorbed, we will see wage growth steadily accelerate.”

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But with another upbeat jobs report comes more rumblings about a rate hike from the Fed and Zandi says expect one sooner rather than later.  “There had been some question about pushing this off until later in the year or even into next year given what’s going on overseas and given the surge in the value of the dollar and the impact that’s having on our trade and on growth,” says Zandi, “but I think all in all, given what’s going on in the job market, given the tightening labor market and the prospects for stronger wage growth, I do think they’ll raise rates…if not in June probably in September.”

The Federal Reserve ended its quantitative easing bond-buying program in October and since then economists and investors alike have been trying to guess when the Fed will raise rates.  After the FOMC meeting in January, the Fed said it would remain "patient."  The Federal Reserve has kept rates near zero since December 2008. 

The fear among some economists is that a move from the Fed could hamper wage growth just when it’s getting started. Wage growth is finally above inflation which is a huge shot in the arm for cash-strapped consumers. 

Zandi isn’t too concerned about the Fed acting too quickly. “We are at a zero interest rate,” he says. “In a normal, typical economy operating at full employment, the federal funds rate, that’s the short term interest rate that the Federal Reserve controls, should be at about 3.5%. So there is a big difference between zero and 3.5.” Zandi believes Janet Yellen's Fed will raise rates at a slow pace, taking two to three years to get to that magic 3.5% level and wage growth will continue in that time."We are going to see a period of much stronger wage growth as a result," Zandi says.

Last year was already considered a banner year for jobs and with the revisions for November and December tucked inside the January report, it was off the charts. OK, maybe not literally. But with the revised figures the economy added nearly a quarter-million more jobs than previously reported.

The only downside to January's report on the surface was an uptick in unemployment. But even that seems to be balanced out by a positive: The labor force participaton rate went up, too. and  "It feels like people who were discouraged, stepped out of the workforce, weren’t looking for work and therefore weren’t counted as unemployed now feel better about things... So this pick up in labor force participation I view as also a very positive development," says Zandi.

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