Wage hike good news for workers, but keeps pressure on Fed

Wages rose at a brisk pace in the year through March and the unemployment rate fell significantly last month, signs of a heated labor market that could keep pressure on the Federal Reserve as it considers how much and how quickly the economy can cool down.

The central bank is trying to slow demand to a more sustainable pace in an instant Inflation is at its fastest pace in 40 years. Federal Reserve officials The interest rate hike began in March They suggested they might raise rates by half a percentage point in May – twice what is usual. Making money more expensive to borrow and spend can eventually slow consumption and employment, reducing wages and price growth.

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

The report showed that wages rose 5.6 percent over the past year, a much faster pace than the 2 to 3 percent annual wage gains that were typical during the 2000s. Meanwhile, the unemployment rate fell to 3.6% in March from 3.8% in February. Unemployment is now just above the half-century low it reached before the pandemic.

“The one-year wage figure is still very strong; it kind of ends any discussion about whether the unemployment rate gives an honest and reliable signal about the labor market,” said Michael Feroli, JPMorgan’s chief US economist. “The labor market is tight.”

While a strong labor market has given policy makers confidence that they can slow the economy somewhat without causing a recession, rapid wage gains can also sustain price increases by helping to maintain consumer demand and prodding firms to raise prices while Trying to cover the high labor costs.

“The promise of higher wages is a great thing,” said Jerome H. Powell, Federal Reserve Chairman, after the central bank’s decision to raise interest rates last month. But the increases “are taking place at levels well above what would correspond to 2 percent inflation – our target – over time.”

The March employment report showed wages were increasing at an annual rate faster than when Mr. Powell made his observation.

Investors were already expecting a half-point increase in May, but after the report was released on Friday the markets They became more determined in this expectation. The odds of a significant rate hike at the central bank’s June meeting also increased.

Wages escalate rapidly as employers compete for a limited group of workers. There are roughly 1.8 jobs available for every unemployed worker, and companies complain about the difficulty of hiring across a range of skills and industries.

Over the past year, wages have increased significantly for workers in Entertainment and hospitality industry, which jumped 14.9 percent, and workers in transportation and warehousing also received double-digit salary gains. These numbers are for workers who are not supervisors.

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

Some economists have clung to the fact that monthly wage gains, while still rapid, appear to have slowed somewhat this year compared to the high rates they touched last year. But many noted that the current pace, following a year of rapid gains combined with continued labor restrictions, may be enough to keep the Fed on high alert.

“If the situation remains tight, the spiral of wages and prices will only accelerate from here,” Mr. Feroli said. “I think they probably think it’s unsustainable,” he said of the Fed.

Rapid wage growth is a boon for many workers, even though families are finding that their salaries, while greater, are no longer buying as much as higher prices. Wage gains are not keeping pace with inflation for many workers.

However, President Biden spoke of rapid labor market progress and wage gains as positive for the economy and a “statement of the kind of economy we’ve been fighting for” while setting policy.

“After decades of abuse and paying too little, more and more American workers now have the real power to get better wages,” Biden said. “Some people see this as a problem – we’ve had this discussion in the past. I don’t. I think it’s long overdue.”

But the White House is also concerned about inflation. The Biden administration is releasing oil from strategic reserves in an effort to lower gas prices. Government It will also allow a file The number of seasonal workers from abroad who are coming to the United States this summer in an effort to reduce labor shortages.

Rising demand isn’t the only driver behind rapid inflation — prices have also risen as supply chains sagged early in the pandemic and struggled to recover. But the fact that people want to buy furniture, clothes and restaurant meals helps keep inflation high.

As the economy adds jobs at higher pay rates, many families have more money than they would otherwise pay. That can keep consumer demand strong, even as the Fed starts raising interest rates.

“There is a great deal of purchasing power to the fight,” said Diane Sonk, chief economist at Grant Thornton. “The job market is a very important part of the overall story.”

Jin Lee, CEO of Darden Restaurants, said During earnings March 24 He says he expects consumers to be able to continue eating out even as government incentives linked to the pandemic fade out of sight and as gas prices soar, shrinking household budgets. Darden brands include Olive Garden, LongHorn Steakhouse and Yard House.

While the restaurant chain raised prices 6 percent in the fourth quarter of fiscal 2021 compared to the previous year, wages at the lower end of the earnings range were increasing even more.

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