Strong wage increases in December could keep the Fed vigilant
Friday’s jobs data suggested wages are still rising rapidly as hiring remains strong — facts that could keep the Federal Reserve on edge as it considers its next move on interest rates.
Fed officials raised rates from near zero to a range of 5.25 percent to 5.5 percent between March 2022 and July last year, but they have kept borrowing costs steady for months as progress has finally been made toward a slower inflation.
Central bankers have yet to rule out another rate hike, but most economists think their next step will be to cut borrowing costs. Fed officials themselves have forecast cuts of three quarter points this year, but they have offered few clues about when those cuts might begin. Investors have bet that cuts could start as early as March.
While the Fed will likely take the December jobs report into account when considering next policy, it is unlikely to be a crucial factor. There will be two more employment reports before the central bank’s March 20 meetingFor example.
But the latest evidence in the labor market could give officials a new reason to be cautious before declaring victory. Friday’s jobs report showed the economy retained a surprising amount of momentum through the end of 2023. In particular, the average hourly wage increased by 0.4 percent compared to the previous month, and by 4.1 percent compared to a year earlier. That was faster than the 3.9 percent expectation in a Bloomberg survey of economists.
Federal Reserve Chairman Jerome H. Powell suggested last month that wage increases would rise at the recent pace about 4 percent from a year earlier – were probably still slightly hotter than what is consistent with slow and steady inflation. If employers pay their workers more, they may try to raise prices to cover higher labor costs, causing inflation to continue to rise.
But Mr. Powell noticed that wage increases had ‘gradually cooled’. The new uptick is just one data point, but if it continues, this trend could be called into question.
Fed officials also took heart from a recent slowdown in job growth, a slowdown that Friday’s report addressed. Employers added 216,000 jobs in December, more than economists forecast, and the unemployment rate remained low.
Yet there are still other signs that the labor market is cooling somewhat: the number of vacancies has fallen and employers themselves often report less stress when it comes to recruitment.
At the Fed’s last meeting, “participants felt that while the labor market remained tight, it was becoming increasingly balanced,” according to the minutes released this week. “Many noted that nominal wage growth had broadly continued to slow and that business contacts expected a further decline in wage growth.”
While the Fed aims to maximize employment – and generally touts strong employment numbers – it is currently balancing this goal with its efforts to cool rapid inflation.