“The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time,” the Fed said in its statement announcing its decision. But exactly where rates will end up remains an open question.
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But the conventional wisdom — that a reduction in inflation won’t be possible without a substantial rise in unemployment — may be off.
The way Employ America economist Preston Mui and other analysts see things, it’s perfectly possible for wage growth to slow down without a spike in unemployment. In other words, the economy could cool off without unemployment having to spike.
While Fed Chair Jerome Powell has long pointed to the number of vacancies per unemployed person as a sign that the labor market is unsustainably tight, Mui points to other data showing that workers are now leaving their jobs less often than they were in the earlier post-pandemic period. (Remember “the great resignation?” It was really “the great job switching,” often coming with “the great pay raise.”)
While normally a strong labor market and rising wages are good for workers, for the Fed, it can happen in a way that’s unsustainable, causing price increases for everyone.
Some Fed board members have recently acknowledged data showing wage growth slowing down but emphasized the need for continued vigilance.
And new data shows that the Fed’s main concern — rising wages — may be resolving itself without increasing unemployment.
“This was the last pixel of the picture that really confirmed what’s happening with wages; they’re slowing down,” said Nick Bunker, head of economic research at Indeed’s Hiring Lab. “Its’ pretty definitive, the debate’s over, wages are slowing down.”
“What we got with [the Employment Cost Index] is confirmation of what we’ve been seeing in other wage measures,” Mui said. “Wage growth and inflation can come down on its own without a recessionary rise in unemployment.”
“We’re seeing a labor market where the unemployment rate is quite low, but wage growth is slowing,” Bunker said, arguing that should alleviate concerns that wages and prices could spiral up together, leading to runaway inflation.
Hiring also notably slowed down, with net job creation falling from around 500,000 a month in the beginning of 2022 to around 200,000 by the end.
“The labor market is softening, there’s less churn in the labor market and wage growth slows down; it’s a natural sequence of events,” Mui said. “It’s hard to make case we need an increase in unemployment to bring wage growth to normal levels.”
“Not only is the immediate threat of inflation waning,” Bunker said, the new data combined with the low unemployed rate indicates that “there might be less of a cost to pay to get inflation” down to a lower level
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