A diminished U.S. workforce could lead Fed to keep rates at high level
WASHINGTON >> Still eager to hire, America’s employers are posting more job openings than they did before the pandemic struck 2½ years ago. Problem is, there aren’t enough applicants. The nation’s labor force is smaller than when the pandemic struck.
The reasons vary — an unexpected wave of retirements, a drop in legal immigration, the loss of workers to COVID-19 deaths and illnesses. The result, though, is that employers are having to compete for a smaller pool of workers and to offer steadily higher pay to attract them. It’s a trend that could fuel wage growth and high inflation well into 2023.
In a recent speech, Federal Reserve Chair Jerome Powell pointed to the shortfall of workers and the resulting rise in average pay as the primary remaining driver of the price spikes that continue to grip the economy.
Though inflation pressures have eased slightly from fourdecade highs — average gasoline prices are now below where they were a year ago — costs are still rising fast in much of the economy’s vast service sector. As a result, the Fed is expected Wednesday to raise its benchmark short-term rate for a seventh time this year, though by a smaller amount than it has recently.
The central bank has boosted its key rate by a substantial three-quarters of a point four straight times, to a range of 3.75% to 4%, the highest level in 15 years. Powell has signaled that the Fed will likely raise its benchmark rate by a half-point this week, and many economists expect quarter-point rate hikes after that.
Cumulatively, those rate increases may be helping slow inflation. But they have also sharply increased borrowing costs for consumers and businesses — on mortgages, auto loans and credit cards, among other loans. Many economists have warned that the resulting decline in borrowing and spending will likely cause a recession in 2023.
Yet with price increases still uncomfortably high, Powell and other Fed officials have underscored that they expect to keep rates at their peak for an extended period, possibly through next year. On Wednesday, members of the Fed’s rate-setting committee will update their projections for interest rates and other economic barometers for 2023 and beyond.
The higher wages that many employers are having to offer don’t always lead to higher inflation. If companies invest in more efficient machines or technology, workers can become more productive: They can increase their output per hour. Under that scenario, businesses could raise pay without having to raise prices.
But productivity has been especially weak in the past year. And Powell has noted that higher pay will likely feed toohigh inflation in the service sector — everything from restaurants and hotels to retail stores, medical care and entertainment. The employers in these industries are labor-intensive, and they tend to pass their higher labor costs on to their customers through higher prices.
Higher wages also typically spur Americans to keep spending, a trend that can perpetuate a cycle that keeps prices high.
“This labor shortage that we have,” the Fed chair said, “it doesn’t look like it’s going away anytime soon. It’s been very disappointing and a little bit surprising.”