Rising wages are good news for workers, but keep pressure on the Fed

Wages rose at a rapid pace in the year to March and the unemployment rate fell sharply last month, signs of an active labor market that could keep pressure on the Federal Reserve as it contemplates how much and how quickly to cool the economy.

The central bank is trying to reduce demand to a more sustainable pace at a time when Inflation is advancing at its fastest pace in 40 years. federal officials started raising interest rates in March and have suggested they may raise rates by half a percentage point in May, twice as much as usual. Making money more expensive to borrow and spend can slow consumption and eventually hiring, which moderates wage and price growth.

Friday’s employment report could strengthen the case for an increase of at least half a point.

Wages rose 5.6 percent over the past year, the report showed, a much faster pace than the 2 to 3 percent annual wage increase that was typical during the 2010s. At the same time, the rate of Unemployment fell to 3.6 percent in March from 3.8 percent in February. Unemployment is now slightly above the half-century lows it had hit before the pandemic.

“The salary number from a year ago is still very strong; It kind of ends any debate about whether the jobless rate is giving an accurate and reliable signal about the labor market,” said Michael Feroli, chief US economist at JP Morgan. “The labor market is tight.”

While the strong job market has given policymakers confidence that they can slow the economy down a bit without causing a recession, quick wage gains could also perpetuate price increases by helping to sustain consumer demand and prompting companies to raise prices as they try to cover higher labor costs. .

“The promise of wages going up is a great thing,” Fed Chairman Jerome H. Powell said after the central bank’s decision to raise interest rates last month. But the increases are “running at levels that are well above what would be consistent with 2 percent inflation, our target, over time.”

The March jobs report showed wages rising at an even faster annual rate than when Powell made his comment.

Investors were already expecting a half point increase in May, but after the release of the report in the markets on Friday became more determined on that prediction. The odds of a big interest rate hike at the central bank’s June meeting also increased.

Wages rise rapidly as employers compete for a finite pool of workers. There are roughly 1.8 job openings for every unemployed worker, with companies complaining of difficulty hiring across a range of skill sets and industries.

During the last year, wages have improved especially for workers in entertainment and hospitality industry, up 14.9 percent, and transportation and warehousing workers have also received double-digit wage increases. Those figures are for workers who are not supervisors.

wages again rose noticeably in leisure and hospitality last month, while wages also rose sharply for workers in the financial and durable goods industries.

Some economists took heart from the fact that monthly wage increases, while still brisk, appear to have slowed somewhat this year from the high rates they reached last year. But several noted that the current pace, after a year of rapid gains and coupled with continued labor restrictions, is probably enough to keep the Fed on high alert.

“If it stays this tight, a wage and price spiral is only going to accelerate from here,” Feroli said. Of the Federal Reserve, he said, “I think they probably think it’s unsustainable.”

Rapid wage growth is a boon to many workers, though families are finding that their larger paychecks no longer allow them to buy as much as prices rise. Wage gains don’t keep pace with inflation for many workers.

Still, President Biden referred to rapid progress in the job market and wage gains as a positive for the economy and a “statement of the kind of economy we’ve been striving for” in setting policy.

“After decades of being mistreated and underpaid, more and more American workers have real power now to get better wages,” Biden said. “Some people see this as a problem; we have had this discussion in the past. I do not. I see it as something backwards”.

But the White House is also worried about inflation. The Biden administration is releasing oil from strategic reserves to try to drive down gasoline prices. the government is also going to allow a little bigger number of seasonal workers from abroad who will come to the United States this summer in an attempt to reduce labor shortages.

High demand isn’t the only driver of rapid inflation: Prices have also risen because supply chains fell behind early in the pandemic and have struggled to recover. But the fact that people want to buy furniture, clothes and restaurant meals is helping inflation continue to rise.

As the economy adds jobs at higher wage rates, many households receive more money than they otherwise would. That could keep consumer demand strong, even as the Fed starts to raise interest rates.

“That’s a lot of spending power to fight for,” said Diane Swonk, chief economist at Grant Thornton. “The labor market is a very important part of the overall story.”

Gene Lee, CEO of Darden Restaurants, said during a March 24 earnings He said he hoped consumers would still be able to eat out even as pandemic-related government stimulus fades and gasoline prices rise, straining household budgets. Darden’s brands include Olive Garden, LongHorn Steakhouse and Yard House.

While the restaurant chain raised prices 6 percent in the final quarter of its 2021 fiscal year compared to a year earlier, wages at the lower end of the profit spectrum rose more than that.

“We think wage inflation across the country is rising at a fairly rapid rate,” Mr. Lee said. “So we think the consumer can handle that right now.”

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