Growth in employment and compensation could influence the Federal Reserve’s next move, according to a Merrill Lynch research report.

 Unexplained rise in withheld taxes after adjusting for special factors. Source: BofA Merrill Lynch Global Research.A report released Wednesday by Merrill Lynch says the latest federal withholding tax figures suggest wages and salaries “have increased substantially” over the past few months, and these numbers “could influence” the Federal Reserve’s short-term policies.

“The surge in wage income should bring comfort to the Fed in removing accommodation and helps our short-duration bias,” rates strategists Marcus Huie and Priya Misra of Bank of America-Merrill Lynch explained. “If the data is primarily driven by employment increases, then the unemployment rate could see further substantial declines ahead. If instead it is due at least in part to wage inflation, there could be a concern over the approach of NAIRU.”

(NAIRU, the non-accelerating inflation rate of unemployment, refers to a level of unemployment below which inflation rises.)

The Merrill experts say that wage and salary increases can indicate either a jump in in the numbers of employed persons or a rise in cash compensation. “So far, the evidence from the February employment report appears to suggest more of the former,” the report said.

The latest withholding-tax information is significant, because it provides a timely snapshot of nationwide payroll volumes. This data, though, tends to fluctuate both during the week and over the month.

In their work, BofA-Merrill researchers use regression analysis to correct for these systematic fluctuations and other special factors. (See chart.)

“Recent data has shown that withheld taxes are running about $30 billion per month over the trend, as compared to Q4 2013 when withheld taxes ran close to trend,” they stated. The upsurge, which began in December, was interrupted in January and February — most likely due to the cold weather — and then “resumed its strong performance in the last several weeks.”

How is the Fed likely to interpret the latest withholding-tax figures, and is it focusing more on wage and salary increases or a rise in cash compensation?

“At the margin, the Fed might be more sensitive to wage-inflation pressures,” Huie and Misra noted. However, data set to be released in the next few month — on wages and salaries, nonfarm payroll and average hourly earning — should shed light on which of the two scenarios is most significant, they add.