Interest Rates: Will Steep Rise in Wages Cause the Fed To Be More Aggressive on Rate Hikes?

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The big news from last week’s January jobs report was that employment for the month rose higher than expected, but some economists put their focus elsewhere: the continuing increase in wages, and how that might play into planned interest rate hikes this year.

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In January, average hourly earnings for all employees on private nonfarm payrolls rose by 23 cents from the prior month to $31.63, according to the U.S. Department of Labor. That continued a recent string of wage hikes as employers compete for workers in a tight labor market. Over the past 12 months, average hourly earnings have risen by 5.7% — the fastest pace in a decade and a half.

This is mostly good news for workers, although the wage hikes still can’t keep up with inflation that has been running at about 7%. But some economists also warn that higher wages have contributed to inflation, which could cause the Federal Reserve to be more aggressive with planned interest rate increases for 2022, CNBC reported.

“If I’m the Fed, I’m getting more nervous that it’s not just a few outliers” that are driving wage increases, Ethan Harris, Bank of America’s head of global economics research, said during a media call reported by CNBC this week. “If I were the Fed chair … I would have raised rates early in the fall. When we get this broad-based increase and it starts making its way to wages, you’re behind the curve and you need to start moving.”

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Bank of America economists expect the Fed to issue seven separate quarter-percentage-point rate hikes in 2022 and then issue four more next year, according to CNBC. That’s a much more aggressive scenario than what most economists expect, but Harris pointed to Fed policy changes as the reasoning behind the call. In particular was a shift in September 2020, when the central bank said it would consider letting inflation run hotter than its normal 2% target to achieve full employment.

Now that inflation is already much higher than that — and the U.S. has reached full employment, according to some measures — the Fed will have to be more aggressive with its rate hikes to tame inflation, Harris said.

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“What’s got us calling for seven hikes is [that] the economy’s not just hitting the Fed’s goals, it’s blowing through the stop signs,” he said.

But others have a more conservative outlook. Goldman Sachs economists see wage growth slowing a little this year to about 5% and call for only four rate increases in 2022. That’s more in line with what most economists expect.

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