A lot of people want the Fed to lower interest rates right now after a year and a half of keeping them at a two decade-plus high. The Fed, which is looking at an economy firmly intact, doesn’t feel like it, and Wall Street bettors are realizing they’ll have to wait awhile. The reason? Inflation has calmed down since the early days of the pandemic, but it’s still not where the Fed wants things. The explanation that Fed governor Adriana D. Kugler zeroed in on during a speech Wednesday (Feb. 7) is… service worker wages.
“Of course, as a general matter, I prefer to see robust growth of workers’ wages, but for wage growth to be sustainable, it must be consistent with 2% inflation,” she told an audience at the Brookings Institution in Washington, DC. And right now, wages are still going up at a healthy clip: The Bureau of Labor Statistics said that in January hourly wages rose 4.5% year-over-year on average in the private sector. The Fed’s preferred inflation gauge is still sitting “too high” at 2.6%. Service wages have largely gotten back in line with the economy as a whole, but at one point, sectors like leisure and hospitality—restaurants, hotels, the like—were having to tackle worker shortages by throwing out double-digit raises.
The problem with workers making “too” much more money, even when those wages are rising faster than inflation and easing the burden of soaring prices, is that businesses employing those people might pass those bigger paychecks onto their customers. “For example, labor costs are roughly 60 percent of value-added in leisure and hospitality and more than 80 percent of value-added in education and health services,” said Kugler, who is a member of the interest-rate setting Federal Open Markets Committee. “An easing of labor-cost growth in these and other labor-intensive services industries is likely to be passed on to consumers as lower prices and to help reduce inflationary pressures.”
Translation: If service workers get fewer, smaller raises, then service providers will do fewer, smaller price increases. Inflation goes down, the economy gets a lower interest rates-flavored treat.
