Fed presidents generally agree that the economy is at or near full employment.In Fed chair Yellen’s semi-annual Congressional testimony this week she made the following observations about the labor market:

In the labor market, job gains averaged 190,000 per month over the second half of 2016, and the number of jobs rose an additional 227,000 in January. Those gains bring the total increase in employment since its trough in early 2010 to nearly 16 million. In addition, the unemployment rate, which stood at 4.8 percent in January, is more than 5 percentage points lower than where it stood at its peak in 2010 and is now in line with the median of the Federal Open Market Committee (FOMC) participants' estimates of its longer-run normal level. A broader measure of labor under-utilization, which includes those marginally attached to the labor force and people who are working part time but would like a full-time job, has also continued to improve over the past year.

Yellen focuses on the more commonly cited labor market numbers such as the unemployment rate, total payroll employment and U-6. These are similar indicators to those preferred by Richmond President Lacker:

Looking back at 2016, real GDP came in a touch below 2 percent. Employment growth slowed as well, from 226,000 jobs per month in 2015 to 187,000 jobs per month. But that rate of growth is still unsustainably high — we need less than half that rate to keep pace with population trends. The unemployment rate was 4.7 percent in December, a relatively low rate by historical standards. Although the unemployment rate ticked up slightly last month, to 4.8 percent, in general it has continued to decline the past few years.

In contrast, Fed President Rosengren prefers less-often cited labor market measures:

“The labor market has significantly improved during the recovery, and my own assessment is that there is very limited slack remaining,” he said, showing how the unemployment rate, quits rate, unemployment duration, and participation rate data all support this conclusion.“There is limited room for further tightening in labor markets before one might see more inflationary pressures.” 

But regardless of the measure, most Fed presidents now argue the labor market is, at worst, fairly close to full employment. The Atlanta Fed’s spider chart clearly illustrates this point:

While utilization is lower than the previous peak in 2009, employer behavior and confidence is higher, perhaps balancing out the weakness in utilization.

The discussion then turns to the issue of prices, which are, according to this week’s CPI data, now above the Fed’s 2% target:

Both core (in red) and overall (in blue) are clearly over 2%, with the overall rate accelerating fairly sharply. Energy costs are the primary driver:

After dropping from 2014 to the beginning of 2016, oil prices have slightly more than doubled over the last 12-13 months. OPECs 2014 decision to open the production spigots was the primary driver for the drop. But their recent decision cut back on production should move the oil market back into a supply and demand equilibrium by the end of this year, if not earlier.

Between the labor market being near full employment and prices rising, most Fed governors now argue that the Fed should raise rates if for no other reason than to make sure the economy doesn’t overtake the central bank. From Yellen’s testimony:

As I noted on previous occasions, waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession.

Boston President Rosengren: 

Importantly, if GDP is growing faster than potential and we reach both elements of the dual mandate, the Federal Reserve risks ‘overshooting,’ potentially jeopardizing the very significant progress of the U.S. economy since the financial crisis.”

Fed President Lacker:

With inflation nearing 2 percent and unemployment low, interest rate benchmarks suggest the Fed’s current interest rate target is exceptionally low. Raising rates sooner and more briskly than markets currently anticipate may be necessary to restrain inflation pressures.

As a result, one rate hike this year is a foregone conclusion, and two are a very high probability. Three might be pushing it, but it certainly wouldn’t be out of the question.