This morning's New York Times [subscription required] highlights a stunning statistic -- labor costs rose 7% between the fourth quarter of 2005 and the second quarter of 2006 after adjusting for inflation. This is up from an earlier estimate of 4%. This matters because, as I posted earlier this month, the Fed's mission is to keep inflationary expectations in check. And with a target of 1% to 2% inflation, the Fed will be hard pressed to paint 7% labor cost growth as within its target.

This would seem to me to heighten pressure on the Fed to renew its interest rate hikes when it next meets.

I am therefore puzzled by a report yesterday that the interest rate futures market rates the odds of another interest rate increase this year at 26% -- down from 39% last week. This report claims that investors were heartened by the lower than anticipated upward revision in GDP growth -- 2.9% instead of the expected 3% -- and the downward revision to core prices -- to 2.8% from 2.9%. One simple explanation for the Fed's reluctance to raise interest rates comes to mind -- November features a congressional election.

Many polls indicate that the Republican party is unpopular and that Democrats are therefore likely to make gains in November. How do interest rates figure into the election in November? With consumer credit card borrowing at near record levels of $2.2 trillion in June and 26.8% of mortgages in adjustable rates, each time the Fed raises rates, it puts the squeeze on millions of voters who are already paying close to $3 a gallon to drive to work.

So if the Fed raises rates, it turns up the anger boil against the party in power. If the Fed can hold off raising rates until after the election, it will take away a bit of potential pain from voters who might be making up their mind about whether to keep incumbents in power. Meanwhile, the 7% increase in labor costs translates into more money in the pockets of these potential voters.

But this leaves open the question of where the economy is heading and what it means for investors. Last week I was in San Francisco -- a place where many US trends get started. There seems to be a lot of venture capital investment going into companies there and the mood seems more upbeat than in Massachusetts.

On the other hand, I always look at the billboards on Route 101 to get a sense of the zeitgeist. I saw a lot of billboards saying "Profit from the coming real estate shakeup." That's interesting particularly in Silicon Valley because there seems to be a labor shortage and people are talking about how there aren't enough houses. Maybe the billboard was referring to shakeups in other parts of the US.

Three things seems clear to me: first, I don't know much about the real estate market (and Sheldon Liber does); second, real estate appears to be a very local business; and third, if the Fed raises rates it will further increase the profit opportunities from the coming real estate shakeup.

My concern is that if the Fed holds off from controlling inflationary expectations until after the November elections, those expectations will become increasingly baked into investor psychology. This would be bad news indeed for stock investors.

Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm, and a Professor of Management at Babson College.