Worker pay growth slowed at end of ’23

WASHINGTON — Pay and benefits for America’s workers grew in the final three months of 2023 at the slowest pace in two and a half years, a trend that could affect the Federal Reserve’s decision about when to begin cutting interest rates.

Compensation as measured by the government’s Employment Cost Index rose 0.9% in the OctoberDecember quarter, down from a 1.1% increase in the previous quarter, the Labor Department said Wednesday. Compared with the same quarter a year earlier, compensation growth slowed to 4.2% from 4.3%.

The increase in wages and benefits was still mostly healthy, but the slowdown could contribute to the cooling of inflation and will likely be welcomed by Federal Reserve policymakers. The Fed kept its key short-term rate unchanged after its latest policy meeting Wednesday but signaled that the first rate cut is likely still months away.

“Not great news for our pay checks, but good news for inflation and the prospect of meaningful” interest rate cuts by the Fed, said James Knightley, chief international economist for European bank ING.

While Fed officials have signaled they will lower their benchmark rate this year, they haven’t signaled when they will begin, a decision eagerly awaited by Wall Street investors and many businesses.

Still, most analysts expect the first cut will occure in May or June.

When the Fed reduces its rate, it typically lowers the cost of mortgages, auto loans, credit card rates and business borrowing.

The pace of worker compensation plays a big role in businesses’ labor costs. When pay accelerates especially fast, it increases the labor costs of companies, which often respond by raising their prices. This cycle can perpetuate inflation, which the Fed is assessing in deciding when to adjust its influential benchmark rate.

Since the pandemic, wages on average have grown at a historically rapid pace, before adjusting for inflation.

Many companies have had to offer much higher pay to attract and keep workers. Yet hiring has moderated in recent months. The more modest job gains have reduced pressure on companies to offer big pay gains.