LDN - Business

U.S. workforce shortages bolster case for Fed rate hikes

[January 19, 2018] By Ann Saphir

LINCOLNSHIRE, Ill. (Reuters) - HydraForce Inc is going to almost desperate lengths, including offering to bus in out-of-town workers, to find the muscle it needs to meet growing demand for hydraulic valves from its three factories north of Chicago.

The Lincolnshire, Ill.-based firm, which wants to add 125 employees to its workforce of 850 this year, has six job fairs planned this month and next and is offering a "wheels-to-work" program for workers without cars.

Even higher wages - the company raised salaries last July and is planning to do so again early this year - have not enticed enough would-be workers, said Robyn Safron, HydraForce's human resources manager.

"A couple of years ago we felt like our walk-in traffic was sufficient," she said in an interview. These days, she added, "I lay awake at night trying to think of things to do" to attract staff.

HydraForce's story is an increasingly common one that backs up a broad range of economic data showing a tightening of the job market even in states like Illinois where unemployment, at 4.9 percent, exceeds the 4.1 percent national average.

And that is making even some centrist policymakers at the Federal Reserve worried that the labor market could get too hot, tipping wage growth and inflation, stuck at low levels since the 2007-2009 recession, into high gear.

So far, wage increases have stayed just ahead of inflation, which in turn has languished below the U.S. central bank's 2 percent target even with unemployment running for nearly a year below levels most economists think are sustainable.

With the jobless rate at a 17-year low, shortages of workers have become more apparent and upward pressure on wages is likely to grow, Dallas Fed President Robert Kaplan said on Wednesday after an event in Palm Beach, Fla.

That means financial markets, which currently are pricing in three rate hikes by the end of this year, may need to brace for a possibly more aggressive path. Based on the summary of economic projections released at the Fed's policy meeting last month, four participants saw more than three rate rises this year, while six anticipated fewer than three.

Kaplan is with the median forecast of three rate rises.

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The Federal Reserve headquarters in Washington September 16 2015. REUTERS/Kevin Lamarque/File Photo

"I don't want to get in a situation where the cyclical inflationary forces are getting stronger and stronger to the point where the Fed feels the need to move much more rapidly to address it," he told reporters.

He said the stimulus from the Trump administration's tax overhaul, with its $1.5 trillion in tax cuts, only added to his conviction on the need for higher rates.

FED PROJECTIONS FIRMING

The Fed projected three rate hikes in both 2015 and 2016, but delivered only one in each, raising doubts in markets about its forecasting. It came good in 2017, raising rates the three times it had projected at the start of the year.

Since the beginning of 2018, markets have gradually fallen in line with the Fed's projection of three rate hikes, though the third is not priced in until the central bank's last policy meeting of the year, in December.

"What I don't want to do is delay and then have to play catch up because we are seeing broader signs of strain in the labor market," Kaplan said, adding that he wants deliberate rate hikes "sooner rather than later."

As yet unknown are the views of incoming Fed Chair Jerome Powell, who will take over from current Fed chief Janet Yellen early next month. On Wednesday, Kaplan said Powell would be "open-minded" both to others' views and to changing data.

"A tipping point appears close at hand, which may make 2018 the year that inflation finally picks up," Deutsche Bank strategists Jim Reid and Craig Nicol wrote in a recent research note, citing a rise in underlying inflation, higher import prices, a stronger manufacturing sector and robust economic growth.

With economic growth - gross domestic product increased at an annualized rate of 3.2 percent in the third quarter - expected to get an extra boost from the tax cuts, economists and Fed officials expect unemployment to fall further.

(Reporting by Ann Saphir; Editing by Paul Simao)

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