MNI BRIEF: Powell 'Watching Carefully' Wage-Price Dynamics

Federal Reserve Chairman Jay Powell said Tuesday large wage increases are worth "watching carefully" for any effect on overall inflation, but the Fed does not see evidence of a wage-price spiral at present.

"If you look back through history, there are times when wages have moved up in a way that has fostered persistent inflation and that hurts everyone," he told the Senate Banking Committee in a hearing to consider him for another term as Fed chair. "We don't see that right now, but we do see these are the biggest wage increases in decades, so we're watching carefully."

Productivity gains and rising profits should help U.S. firms absorb the cost of higher wages, muffling the inflationary impact of a job market boom and increased worker bargaining power, Cleveland Fed economist Robert Rich told MNI this week.

Powell said the labor market has recovered "incredibly rapidly" since June, with the unemployment rate dropping more than three-tenths a month on average. Unemployment at 3.9% in December is "near half-century lows" and inflation is "very far above our target." The economy "no longer needs or wants the very highly accommodative policies that we've had in place to deal with the pandemic and the aftermath," he added. "We're moving over the course of this year to a policy that's closer to normal, but it's a long road to normal from where we are."