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 Everything from job growth and inflation to manufacturing and retail
sales are stronger now that U.S. economic growth has rebounded from
a brutal winter. Some employers are even complaining about a lack of
skilled workers, and surveys are showing businesses boosting
compensation or planning to do so.
Yet Fed officials, who gather for a policy meeting July 29-30, are
in no rush to talk about hiking interest rates because wage gains
remain stubbornly low, raising questions about just how close the
United States is to full employment.
While some of the more hawkish officials are anxious to tighten
monetary policy and a number of private economists are warning the
U.S. central bank risks falling behind on the inflation curve, Fed
Chair Janet Yellen has signaled she will resist their pressure until
the wage picture is clearer.
Data on Tuesday showed only a modest rise in core consumer prices
and the Fed's preferred inflation gauge is still below target,
giving Yellen breathing room to continue her very cautious steps
toward a rate increase, probably next year.
In congressional testimony last week, she said the Fed was "closely
watching" for signs of wage growth, which has been essentially flat
so far this year despite strong jobs growth.
"There is some room there for faster growth in wages and for real
wage gains before we need to worry that's creating an overall
inflationary pressure for the economy," Yellen said.
After its meeting next week, the Fed's policy panel will likely nod
to the hotter labor market and a fresh reading on growth due on
Wednesday that is expected to show the economy expanded at a decent
2.9 percent annual rate last quarter.
Yet in its statement, the Fed will almost certainly reiterate that
"highly accommodative" policy is still needed and that rates will
stay near zero for a "considerable time" after it ends an asset
purchase program, putting the first rate-rise in perhaps the second
or third quarter of next year.
The Fed is also expected to trim its monthly bond buying by another
$10 billion.
"Notwithstanding the mostly positive and encouraging character of
recent data, we policymakers need to be circumspect when tempted to
drop the gavel and declare the case closed," David Altig, the
Atlanta Fed's research director and a regular at policy-setting
meetings, wrote in a blog post this week.
NOT THERE YET
The Fed is not the only central bank puzzling over low wages amid a
growing economy: minutes from the Bank of England's recent meeting
show officials there were cautious about tightening policy too early
given "contradictory signals" from wages in an otherwise strong
labor market.
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In the United States, hourly wages are currently growing at a
2-percent pace, well below the 3.5 percent to 4 percent that Yellen
has said would signal a healthy labor market. Some economists point
to alternate measures of wage growth that show a much quicker pickup
in pay, and suggest the Fed risks falling behind the inflation
curve.
But two relatively obscure gauges back the view that future pay
increases will not come fast and furious.
The San Francisco Fed's "wage rigidity meter," which tracks the
percentage of workers subject to wage freezes, is stuck above 15
percent. That's well above the 12 percent level associated with a
healthy labor market, according to Bart Hobijn, one of San Francisco
Fed's leading labor economists.
Another key reading is the percentage of workers who voluntarily
leave their jobs. The rate tends to rise, signaling future wage
increases, when people grow more optimistic about finding another
job.
At 1.8 percent, the quits rate is up since the depths of the
recession, but is still well under the 2.2 percent historically
associated with a healthy level of wage increases. "It still has a
ways to go," said Hobijn.
Given that, Fed policymakers will probably wait until their next
policy meeting, set for Sept. 16-17, when they are on the cusp of
ending the bond-buying program, before giving a firmer sense of when
they expect to raise rates.
By then, Yellen and others hope to know whether the economy's engine
is still missing the piston of wages.
(Reporting by Jonathan Spicer and Ann Saphir; Editing by Bernard
Orr)
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