Employers should stop giving pay rises to their staff, a member of the Federal Reserve Board has said, in an effort to help reduce inflation.
Christopher Waller, one of six members of the Fed’s board of directors, gave a speech in Phoenix, Ariz., urging bosses to consider inflation when reviewing their workforce.
He pointed out that there are now nearly two jobs for every person looking for work and that wages are rising faster than they have in decades, making the goal of 2 % inflation even more difficult to achieve.
“Wage growth has been a contributing factor to inflation, particularly in the service sector, so better balancing the labor market is important to bring future wage growth to a more sustainable level that will help make lower headline inflation,” Waller said.
“Any other time I’d be quite unhappy with slow growth, but not now.”
Christopher Waller, a member of the Fed’s six-person board of governors since December 2020, expressed concern that wage increases were driving up inflation
The Fed issued a series of unusually large rate hikes of 75 basis points, bringing the key rate to a range of 3.75 to 4%, from near zero in March.
U.S. unemployment is at its lowest level in nearly 50 years, and rising wages, Waller said, are driving up inflation
HarperCollins Publishing employees protest outside their Manhattan offices on November 15
The Fed has aggressively raised its key rate in an effort to keep inflation in check by cooling the economy with higher borrowing costs.
Consumer price inflation fell in October to 7.7% from a 40-year high in June of 9.1%.
Waller said the “tight” job market was still a concern, telling his audience, “Business contacts tell me about empty offices and unused production capacity because employers can’t find workers.”
The US labor market remains extremely strong, with unemployment at its lowest level in nearly 50 years.
The latest government data, from November 4, showed payrolls increased by 261,000 in October.
The increase is less than in the first quarter of the year, when 539,000 additional jobs were created each month.
He noted the recent wave of layoffs in the tech sector – with Amazon, Twitter and Facebook all shedding thousands of jobs – but said it had not spread to other sectors.
“While there was about one vacancy for every job seeker in what was a strong job market before the pandemic, there are now almost two jobs for every person looking for work,” did he declare.
He pointed to the Federal Open Market Committee’s (FOMC) goal of having inflation at 2% and said wage increases were making that target more difficult to achieve.
“Wages have grown faster than they have in decades, much faster than productivity growth plus 2 percentage points, which I consider to be in line with the 2% inflation target. of the FOMC,” he said.
“But I see tentative signs of some cooling in the labor market, which is essential to prevent rising labor costs from putting upward pressure on inflation.”
Waller said he wouldn’t make a final decision on what to do at the Fed’s monetary policy meeting in December until he reviewed the rest of the data by then.
“I won’t be rigged by a report,” Waller said of consumer price data released last week, showing inflation fell to its lowest annual rate since January.
“I cannot stress enough that a report does not create a trend. It is far too early to conclude that inflation is headed down sustainably,” he added.
However, Waller also said the latest inflation reports were a “positive development” which he hoped would be “the start of a significant and persistent decline in inflation” towards the 2% target of the Fed.
Waller says he’s now “more comfortable” with smaller interest rate increases going forward
Waller spoke after consumer price data released last week showed inflation fell to its lowest annual rate since January
Waller noted that the Fed’s rate hikes have already had a significant impact on the housing market, which is the most interest rate sensitive sector.
“As home purchases plummet, demand for the goods that typically accompany purchases also declines — new carpets, new furniture, new lawn mowers, etc.,” he explained.
“Thus, slowing home sales will decrease the demand for goods that complement the purchase of a new home and that will put downward pressure on the prices of those goods,” Waller added.
“Our aim is to rein in demand, balancing supply and demand, which will help reduce upward pressures on inflation,” he said.
Waller praised the latest inflation report, showing that headline inflation and core inflation both slowed in October.
“While good news, we should be careful not to read too much into a single inflation report,” he said. “I don’t know how sustained this deceleration in consumer prices will be.”
To fight inflation, the Fed issued a series of unusually large rate hikes of 75 basis points, bringing the key rate to a range of 3.75 to 4%, from near zero in March.
Waller said that as it stands, “the data over the past few weeks has made me more comfortable considering moving back to a 50 basis point hike” in December and possibly lower increases. a quarter point thereafter.
The Fed’s latest policy statement signaled a likely reduction in the magnitude of future rate hikes, with officials focusing on a more nuanced approach that gives them more time to monitor the behavior of the economy and inflation while leaving themselves free to continue pushing rates higher .
Recent positive inflation news has led investors to bet that the Fed may not have to do as much as expected and may only have to raise the target policy rate to around 5 %.
Waller said signs of a slowing economy and wage growth have reinforced his sense that Fed policy is starting to do its job.
But he warned it was too early to determine how high rates might have to go.
“For inflation to come down significantly and persistently toward our 2% target, the federal funds rate will need to be increased next year,” he said. “We still have a long way to go.”
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