Solid Hiring Without Wage Jump Tests Fed Hopes for Inflation
This article by Craig Torres for Bloomberg may be of interest to subscribers. Here is a section:
The August employment report released Friday will sharpen the debate. The figures showed a monthly net gain of 151,000 jobs, an unemployment rate holding at 4.9 percent and a slowdown in wage growth. There’s ammunition in the latest data for officials who want to delay a rate increase as they look for signs of continued tightening in the job market. A critical component in Fed officials’ forecast is a rise in wages that boosts demand and drives prices higher.
“Nobody understands the inflation process, including the Fed,” said Torsten Slok, chief international economist at Deutsche Bank AG in New York. “When we are near full employment, why has inflation been so incredibly well-behaved?”
After the report, traders trimmed their bets on a rate hike at the Sept. 20-21 FOMC meeting to a roughly 14 percent chance, according to federal funds futures contracts.
The mystery of weak wage growth is troubling, for the short run and the longer-term. If Yellen and the FOMC majority are wrong, inflation could remain stuck below their target, setting the economy up for lower rates of inflation in the next downturn.
Wages are one of the most important figures to watch to decipher what the direction of Fed policy is likely to be because it cannot simply be headoniced out of the data. For example unemployment is a factor both of how many people are unemployed but also how many are looking for jobs. Lower participation rates flatter unemployment. You can’t do that with wages and because wage demands rise when workers feel they need more money to meet their liabilities they act as a barometer for inflation.
The US Average Hourly Earnings for All Employees broke out a year ago and the Fed raised rates shortly afterwards. Today’s updated figure with a sharp slowdown in wage growth is likely to act as a headwind to additional Fed action. Considering how close the Presidential election is it would be reasonable to assume the next possible moment for a move would be after November 8th.
Precious metals have been among the greatest beneficiaries of this news and improved on yesterday’s upward dynamics to confirm lows of at least near-term significance.