Wednesday, September 17, 2014
Inquirer Daily News

Fed: Wage pressures no threat to economy

Economics in a nutshell: If it is all about the labor market and wage pressures, then the Committee did elevate its thinking about the potential for rising compensation to the top of the discussion. That said, the members then decided to downgrade the threat by indicating there was "significant underutilization of labor resources".

Fed: Wage pressures no threat to economy

Morning commuters drive past the Federal Reserve Bank building in Washington March 18, 2009. (Jonathan Ernst / Reuters File Photo)
Morning commuters drive past the Federal Reserve Bank building in Washington March 18, 2009. (Jonathan Ernst / Reuters File Photo)

Indicator: July 29, 30 '14 FOMC Meeting

In a Nutshell: "...a range of labor market indicators suggests that there remains significant underutilization of labor resources."

Rate Decision: Fed funds rate maintained at a range between 0% and 0.25%

Quantitative Easing Decision: Bond purchases reduced by $10 billion to $25 billion

More coverage
 
Jobs and the economy: What today's numbers mean

The latest FOMC two-day meeting was not expected to create any major change in the messages that the Fed members have been trying to send, and it didn't. But there were still some interesting takeaways from the statement.

If it is all about the labor market and wage pressures, then the Committee did elevate its thinking about the potential for rising compensation to the top of the discussion. That said, the members then decided to downgrade the threat by indicating there was "significant underutilization of labor resources". There is still belief that the labor market will improve, but right now they seem to be saying potential wage pressures are not a threat. The statement seemed to be a little more cautious about inflation, which has accelerated recently. The comment was that "Inflation has moved somewhat closer to the Committee's longer-run objective" rather than just being below target. I am not exactly sure how much worry that shows given the lack of concern about wages, but at least there was recognition that the rate is moving upward.

Otherwise, everything was expected. The Committee knew that growth had rebounded in the spring and said so. With growth back on track, it was easy to continue the reduction in asset purchases by another $10 billion. It is likely that quantitative easing will be a thing of the past as of the October meeting. But other than indicating that all funds would be reinvested, there was no indication of what will happen to the Fed's balance sheet after asset purchases end. As for the funds rate, it was repeated that "it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends". Since considerable time is about six months - per Janet Yellen - and the program should end in October, that gets us to April. I think the March meeting is still a good possibility.

Okay, what does this all mean? There seems to be a growing discontinuity between the firming labor market data, excluding wages, the upward trend in consumer costs and the Fed's lack of concern about future inflation. Indeed, it is unclear why the Fed believes that wages will not start rising faster by year's end. Keep in mind, the Fed has been so easy for so long that it will take at least two years or longer to unwind everything. If they are using wages, which is a lagging indicator of a lagging indicator, to signal inflation pressures, then they are taking a fascinating gamble. While I am not an inflation hawk by any means, it is time for the Fed to explain how it will know when labor market conditions are becoming tight. My view is simple: If you wait until you see that wage pressures are building, it will be very late in the process to begin dealing with the rising cost pressures. That is true for both businesses and the Fed.

About this blog
Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm in Bucks County. He advises companies across the country on the risks and opportunities that economic developments may have on the organization’s operating environment. An accomplished public speaker, Joel’s humor and unique ability to make economics understandable have brought him a wide following. Reach Joel at joel@naroffeconomics.com .

Joel Naroff
Business Videos:
Also on Philly.com:
Stay Connected