Slower pay gains may give Fed room to cool economy
It’s already clear that the Federal Reserve is poised to raise interest rates by a quarter-point this month, as it looks to make borrowing more expensive in an attempt to cool off the economy.
The central bank’s chair, Jerome Powell, made that clear this week.
But the February employment data released Friday will inform policymakers as they discuss plans for shrinking the central bank’s balance sheet (something that can take additional juice out of the economy) and as they lay out estimates for how quickly interest rates will increase in the months ahead.
The latest employment report showed that the economy added 678,000 jobs last month. But more important, from the Fed’s perspective, it showed that unemployment fell to 3.8 percent, workers rejoined the labor force and wage growth came in flat after a series of brisk increases.
The data reaffirm that the job market is vibrant, and may also reduce — slightly — the concern that the nation is at the start of an inflationary spiral in which wage and price increases push one another steadily higher. But for now, they are likely to keep central bankers on track for the plan Powell set forward this week.
“It’s good news, it doesn’t really change anything that Chair Powell was sort of pre-positioning the Fed for, the other day,” Charles Evans, president of the Federal Reserve Bank of Chicago, said on CNBC on Friday.
While Evans still struck a cautious tone, suggesting that wages and prices may continue to increase, the fresh data could have a small influence on how some officials think about the outlook for interest rates in the months and years ahead.
The Fed will release forecasts in its quarterly Summary of Economic Projections alongside its March policy decision, and given that a rate increase is already expected, those policy expectations are likely to take center stage.
Russia’s invasion of Ukraine has made the path ahead more uncertain, so the economic projections will serve as more of a rough blueprint than an ironclad plan. But for now, the economy is looking strong — and officials are likely to project a series of policy changes in 2022 and into 2023.
But more modest wage growth, if sustained, might give the Fed a little more breathing room to pull back support steadily but not frantically. As jobs have proved plentiful and workers have been hard to find, wages had begun rising swiftly, catching the Fed’s attention. Quick pay gains have raised the possibility that labor costs could begin to feed into higher prices, making them last longer.
The report released Friday is just one number and wage data bounce around, but it may take pressure off at the margin. Average hourly earnings climbed 5.1 percent in the year through February, well under the 5.8 percent gain economists had expected. On a monthly basis, pay did not pick up at all.
The annual gain is still a solid pace of wage increases for America’s workers — hourly earnings typically picked up 2 percent-3 percent in the years before the pandemic — but if pay gains continue to moderate, they might strike central bankers as more sustainable.
That is especially true because the slowdown came as the share of people working or looking for work picked up, and as workweek hours increased, suggesting that employers are managing to find a more ready supply of labor. With more workers available, the economy may be able to produce more and grow more rapidly without overheating.
While workers would obviously prefer a more rapid pace of pay gains, even robust raises have not been enough to keep up with inflation in recent months. If the Fed and market forces can bring price increases down without causing a painful recession that tosses people out of work, that might ensure that steady pay gains are able to continue without being completely eaten up by higher prices — a good outcome that economists sometimes refer to as a “soft landing.”