Employers should stop giving their employees pay rises, a member of the Federal Reserve Board of Directors said, in a bid to bring down inflation.
Christopher Waller, one of six Fed board members, used a speech in Phoenix, Arizona, to urge chiefs to take inflation into account when looking at their workforce.
He pointed out that there are now almost two jobs for every jobseeker and that wages are rising faster than they have been in decades – making the target of 2 percent inflation even more difficult to achieve.
“Wage growth has contributed to inflation, particularly in the service sector, so it is important to rebalance the labor market to bring future wage growth down to a more sustainable level that will help bring down headline inflation.” Waller said.
“Any other time I would be pretty unhappy about a slowdown in growth, but not now.”
Christopher Waller, a member of the Fed’s six-member Board of Governors since December 2020, said he was concerned wage increases would push up inflation
The Fed issued a series of unusually large rate hikes of 75 basis points, raising interest rates from near zero to a range of 3.75 to 4 percent in March
Unemployment in the United States is at a nearly 50-year low and wage growth, Waller said, is fueling inflation
HarperCollins Publishing employees protest outside their Manhattan offices on November 15
The Fed has aggressively raised interest rates to tame inflation by cooling the economy through higher borrowing costs.
Consumer price inflation fell to 7.7 percent in October from a 40-year high of 9.1 percent.
Waller said the “tight” job market remained a concern, telling his audience, “Business contacts tell me about empty offices and unused production capacity because employers can’t find workers.”
The job market in the United States remains extremely strong, with unemployment at a nearly 50-year low.
The latest government data on November 4 showed that the number of employed rose by 261,000 in October.
The increase is smaller than in the first quarter of the year, when an additional 539,000 jobs were added each month.
He noted the recent spate of tech layoffs – which have seen Amazon, Twitter and Facebook cut thousands of jobs – but said they have not spread to other sectors.
“Whereas before the pandemic, in a strong job market, there was about one vacancy for every job seeker, now there are almost two vacancies for every job seeker,” he said.
He pointed to the Federal Open Market Committee’s (FOMC) target of 2 percent inflation, saying wage increases made that target more difficult to achieve.
“Wages have been rising faster than they’ve been in decades, much faster than productivity growth plus 2 percentage points, which I think is consistent with the FOMC’s 2 percent inflation target,” he said.
“But I see tentative signs of some slowdown in the labor market, which is crucial to prevent rising labor costs from putting upward pressure on inflation.”
Waller said he won’t make a final decision on what to do at the Fed’s December meeting until he reviews the rest of the data by then.
“I will not be fooled by any report,” Waller said of consumer price data released last week, which showed inflation slipped to its lowest annual rate since January.
“I cannot stress enough that a report does not represent a trend. It is far too early to conclude that inflation is coming down on a sustained basis,” he added.
However, Waller also said the latest inflation reports are a “positive development” that he hopes will be “the beginning of a meaningful and sustained decline in inflation” back towards the Fed’s 2 percent target.
Waller says he’s “more comfortable” with smaller rate hikes now.
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, the sector most sensitive to interest rates.
“When home purchases fall, so does demand for the goods that normally accompany the purchase – new carpets, new furniture, new lawn mowers and so on,” he explained.
“So the slowdown in home sales will reduce demand for commodities that complement buying a new home, and that will put downward pressure on the prices of those commodities,” Waller added.
“Our goal is to rein in demand and better balance demand and supply, which will help ease upward pressure on inflation,” he said.
Waller praised the latest inflation report, which shows headline and core inflation slowed in October.
“Although welcome news, we must be careful not to read too much into an inflation report,” he said. “I don’t know how sustainable this slowdown in consumer prices will be.”
To fight inflation, the Fed issued a series of unusually large rate hikes of 75 basis points, raising interest rates from near zero to a range of 3.75 to 4 percent in March.
Waller said that “the last few weeks’ data has made it easier for me to backtrack to a 50 basis point hike in December and maybe smaller quarter point hikes thereafter,” Waller said.
The Fed’s latest policy statement pointed to a likely move lower in the scope of upcoming rate hikes, with officials shifting focus to a more nuanced approach that gives them more time to monitor the behavior of the economy and inflation while freeing themselves let interest rates continue to rise.
Recent positive news on inflation 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 interest rate to around 5 percent.
Waller said signs of a slowdown in the economy and wage growth have added to his sense that Fed policy is starting to do its job.
However, he warned that it is too early to say how much interest rates might need to rise.
“To bring inflation down significantly and sustainably toward our 2% target, we need to raise the federal funds rate into next year,” he said. “We still have a long way to go.”