Fed Points to Ongoing High Wage Growth for Additional Rate Hikes

Wednesday’s Fed meeting was attended by a few officials. Continued strength of the job market Evidence of inflation pressures persisting will require the Fed to keep raising interest rates for a longer duration and to keep them up.

“There’s not much evidence in my view that the rate hikes we’ve done so far are having much of an effect on the job market,” Neel Kashkari, Minneapolis Fed President, spoke at a Boston Economic Club town hall. “So that means we need to do more. How much more, I’m not sure.”

Together with Fed Governor Christopher Waller of New York and Fed President John Williams, Kashkari noted Wednesday that wage inflation is still a concern. “well above” levels consistent with the Fed’s 2% inflation target, pointing to continued inflation in the services sector, excluding housing.

Kashkari claimed that wage growth of 3% or less would be more consistent to 2% inflation.

The comments come after a much stronger-than-expected report Friday Figures show that 517,000 jobs were created during December. The annual wage growth was 4.4% in comparison to November’s 5.1%.

Waller claimed that the recent data was moving in a positive direction, but added that he is still watching for slower growth.

“We don’t want excessive wage increases to be a potential source of higher inflation in the future,” He said.

While some, including Fed Chair Jerome Powell (who suggested it), disagree with this suggestion Inflation expected to fall this year, Waller said he’s not seeing signs of that.

“That would be a welcome outcome,” Waller spoke at the Arkansas State University Agribusiness Conference. “But I’m not seeing signals of this quick decline in the economic data, and I am prepared for a longer fight to get inflation down to our target.”

The key — said the New York Fed’s Williams — is to raise rates to levels that will restrict growth and keep them there for a few years to continue its restraint.

“To me, the important thing is we need a sufficiently restrictive stance and we need to attain a sufficiently restrictive stance of policy,” Williams spoke at an Wall Street Journal event. “We’re going to need to maintain that for a few years to make sure we get inflation to 2%, and then eventually over time we’ll get interest rates presumably back to more normal levels.”

He pointed out that the rates at this time are not restrictive enough.

Williams indicated that forecasts by Fed officials to raise the federal funds rates this year to between 5.5% and 5.25% were still a good guide as to where interest rates will go this year. The Fed raised its benchmark rate from 4.50% to 4.755% last week after the Fed’s most recent hike. It’s the highest level in a decade.

Williams said that future rate rises will be a quarter of a percentage point “seems like the right size.” However, he stated that any further increases would be determined by incoming data.

“If financial conditions loosen too much, we would have to go higher on rates,” He said.

Williams stated that the Fed will not be able to reduce rates because the market tried to outrun it on pricing in. He said that the Fed would only need to respond to lower levels or weaker inflation in the future.