The Fed’s Language May Change This Week—Let’s Hope It Doesn’t Signal Interest Rates Going up Sooner
The Federal Open Market Committee (FOMC) will meet on Tuesday and Wednesday of this week. Word on the street is that they will shift the language they use to describe the likely future path of short-term interest rates. Recently this language has stressed that very low short-term rates are likely to persist for “a considerable time.” The new language may instead stress the need for Fed “patience” with lower rates.
To real-life human beings, of course, parsing such language is an exercise that goes so far beyond splitting hairs it’s absurd.
But it matters. The Fed is the most important economic policymaking institution in the United States right now. They have, by far, the most influence on whether American workers’ hourly wages and living standards will begin rising or not in coming years. If they raise interest rates before genuine recovery from the Great Recession is secured, the hopes for real (inflation-adjusted) wage increases for the vast majority of Americans will be torpedoed. And, this switch from “considerable time” to “patience” will be interpreted as inflation hawks on the Fed who want to see an earlier interest rate increase gaining a small patch of intellectual territory.
Does surrendering this small patch of rhetorical territory actually mean that rates will begin rising faster than they would have otherwise? I have no idea.
One could argue that because the unemployment hawks still have the majority—and that majority includes the incredibly influential Chair Janet Yellen and Vice-Chair Stanley Fischer—that a rapid return to higher interest rates remains hugely unlikely. In this view, the small rhetorical surrender could actually be a strategic play to give the inflation hawks some small-but-mostly-meaningless victory to claim and that this will actually make it harder for them hawks to demand yet more movement in the near term.
I hope so, because a fact-based judgment is clear: there is no sign of wage-push inflation on the horizon, because there is still an enormous amount of slack that needs to be taken up before a genuine recovery can take hold. Seen in light of these facts, it should be a long time before the Fed should enjoy the enormous luxury of worrying about too-rapid wage growth.
The best metric demonstrating the remaining amount of slack is the cumulative shortfall of nominal hourly wages versus what these wages would’ve been had the Great Recession not bent their trajectory steeply down.
Mind the wage gap: Cumulative nominal average hourly earnings, actual and hypothetical if they had grown at 4% since the recession began, 2007–2014
|Actual average hourly earnings of all private employees||Hypothetical, assuming 4% growth*|
* Nominal wage growth consistent with the Federal Reserve Board's 2 percent inflation target, 2 percent productivity growth, and a stable labor share of income.
Source: EPI analysis of Bureau of Labor Statistics Current Employment Statistics public data series
As we explain here, the trend nominal wage path we sketch in this figure is one consistent with the Fed’s deeply conservative 2 percent inflation target (which they have, of course, missed on the low side more often than not in recent years). And yet nominal wage growth in recent years has been far too long even to be consistent with this low inflation target.
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