MNI POLICY: Stubborn Wage Growth Too High For Fed's Comfort

U.S. wage growth trends have further cemented the Federal Reserve’s desire to remain patient before considering interest rate cuts, with gains in pay having stabilized above levels consistent with price stability for nearly a year now.

While policymakers see robust wage growth as a reflection of workers trying to catch up with an inflationary spurt that peaked in 2022 rather than as a fundamental driver of inflation, persistent increases above 4% as gauged by a variety of measures are still well above a 3.5% ballpark the central bank views as in line with its 2% inflation goal. That’s a sign overall price pressures are likely not coming down quickly enough.

As Chair Jerome Powell stressed at this month’s post-FOMC press conference, while high wages are a welcome development, the Fed will strive to avoid the high inflation which would eat up the gains. (See MNI INTERVIEW: Fed To Cut At Most Once This Year-Ghamami)

PICK YOUR INDEX

The stalling of the deceleration of wage growth has also coincided with sticky measures of core services inflation ex-housing, so-called supercore. That’s a worry because it’s the wage-intensive nature of the service sector that has drawn the Fed’s particular attention in the first place.

The U.S. Employment Cost Index picked up steam again in the first quarter, rising 1.2% versus 0.9% in the last three months of last year. That was above forecasts for a 1.0% rise and the prepandemic average of around 0.6%.

The Atlanta Fed’s Wage Growth Tracker has come down steadily after peaking at 6.6% in 2022, but the pace of decline has slowed and the overall level remains high at 4.7%, having stood at 3.7% just before the onset of Covid. The New York Fed’s Trend Wage Inflation measure has also flattened out around 5% since the middle of 2023 and the economists who compile it wrote in an April blogpost that “it cannot be ruled out that wage growth will continue to be markedly higher in the near-term than it was before the pandemic.”

Perhaps the most benign signal comes from the Labor Department’s average hourly earnings reading, which softened to an annual 3.9% in April – still too high for the Fed’s comfort.

LACK OF PROGRESS

The FOMC kept rates on hold for a sixth meeting last week at a 23-year high of 5.25-5.5%, indicating that rate cuts are likely further out in the future than previously expected due to a “lack of further progress” on inflation. (See MNI INTERVIEW: Fed Rate Cut Timeline Pushed Back-Reinhart)

It’s not that policymakers see a strong job market in itself as an impediment to lower inflation. Indeed, they have warmed in recent months to the idea that the economy can experience a soft landing where inflation eases without major damage to employment.

Still, hefty wage gains have corresponded with a buoyant labor market that continues to defy expectations for a significant slowdown, despite hints of moderation in demand and improvements in the supply of labor. That makes it hard to disentangle the strength in wages from that in jobs – and thus to dismiss ongoing wage hikes as catch-up alone.