Illustration: Sarah Grillo/Axios
Just as American workers are starting to see some real improvement in hourly pay, the fear is that — as central bankers traditionally do — the Fed will put a stop to it by raising interest rates. That's because "wage growth" means inflation, according to economic orthodoxy, and inflation is the Fed's main enemy.
- But not this time. Leading economists tell Axios that, at least in part because inflation does not seem to be accelerating, the Fed appears prepared to let the wage party continue.
- Last year, wages grew by 3.2%, the biggest increase since 2009 and a full 1.2% higher than inflation, the Bureau of Labor Statistics reported last Friday. Inflation was just 1.9% for the year.
- This means that workers — after three and a half decades of essentially flat wages — are finally clawing back real added income.
- Normally, the next thing would be for the Fed to take away the punch bowl — to raise interest rates a tick. But, as Axios' Dion Rabouin reported last week, Fed Chairman Jerome Powell appears likely to keep interest rates flat this year.
"Powell seems to be adopting the 'whites of the eyes of inflation' position that I and many others have advocated for a long time," Larry Summers, who served in both the Clinton and Obama administrations, tells Axios. "No need to worry about apparently tight labor markets and wage increases until product price inflation is accelerating past 2%. We are not there."
- The Fed strategy is buttressed by new research showing that ultra-low unemployment generally does not lead to wage surges, and big jumps in inflation. In a paper published today, three researchers at the San Francisco Fed said they do not expect "an abrupt jump in wage growth."
- Last summer, we reported a growing opinion among economists that the Fed should not apply the brakes to wages, but let workers catch up more after decades of more or less flat pay.
"Too often central bankers talk about any wage gains beyond productivity growth as immediately automatically inflationary — when they need not be," Adam Posen, president of the Peterson Institute of International Economics, told Axios today.
- "This is a welcome public recognition by the [Fed] leadership," Posen said. "Combined with their willingness to wait and see on inflation data, this could result in some real wage gains. And I think they're right to take that risk."
Jason Furman, a former chief economic adviser to Barack Obama and now a Harvard professor, said that to achieve sustained real wage growth, productivity will have to grow much faster. Over the last decade, productivity has risen less than 1% a year, lower than the 3% average in the 1950s, but no one has figured out why — nor are they confident about how to improve its performance.
"There is still scope for faster wage growth through either faster productivity growth or a compression of inequality," Furman said. "But that scope may be more limited than Powell or any of us might like."