The US labor market continues to tighten, although job growth in April was 164,000, a little below expectations. The unemployment rate dropped to 3.9 percent in April, one of the lowest rates in recent history. The broader measure of labor underutilization U-6 declined to 7.8 percent, the lowest rate since 2001.

The tightening labor market is a result of a simple reality: when the working age population is barely growing, even moderate job growth is enough to significantly tighten the labor market. Based on present data, there is no reason to believe that this trend will stop anytime soon, meaning a much tighter labor market a year from now.

Despite the tightening labor market, the average hourly earnings measure is not accelerating much, though the more reliable Employment Cost Index, released last week, has been accelerating more visibly, especially among blue-collar workers.

Overall, with solid economic and job growth, a strong labor market, and an inflation rate that is about to surpass the Fed’s target, there is nothing to hold back the Fed from continuing on its present path towards full interest rate normalization.