At a time when inflation is roughly double the Federal Reserve’s 2 percent target, U.S. workers are still enjoying notable pay raises. However, the good news for the labor force might be bad news for the Fed’s fight to vanquish inflation from the economy.
The employment cost index (ECI) rose by 1.1 percent in the third quarter, the Bureau of Labor Statistics said on Nov. 1. That’s an increase from 1 percent in the second quarter, and also slightly higher than the consensus estimate of 1 percent.
Meanwhile, on a year-over-year basis, employment costs eased to 4.3 percent in the July–September period, from 4.5 percent for the three months ended in June.
Wages and salaries increased by 1.2 percent, while benefits costs rose by 0.9 percent.
Private industry workers’ compensation swelled by 1 percent quarterly. But it slowed to an annualized pace of 4.3 percent, from 5.2 percent in September 2022.
State and local government workers’ earnings surged by 1.5 percent in the third quarter. Government compensation rose to an annual rate of 4.8 percent last month, compared with an increase of 4.6 percent in September 2022.
Diane Swonk, KPMG’s chief economist, wrote on X that the government is starting to fill positions that have been left unstaffed in the public sector.
“Also notable is that the gap between public and private sector [compensation] has flipped, with public sector comp now outperforming the private sector for two consecutive quarters,” Ms. Swonk stated. “The level of wages in the public sector are still low relative to many in private sector, but the shifts we are seeing is one reason public sector hiring picked up relative to total hiring over the summer.
“We are only beginning to fill positions long left unstaffed in the public sector, notably in public education.”
Compensation gains varied across the marketplace.
Occupational groups that enjoyed gains exceeding the quarterly average were public administration (1.7 percent), credit intermediation (1.7 percent), education (1.4 percent), and nursing (1.3 percent).
The Effect on Monetary Policy
Fed officials and economists prefer the ECI to the monthly jobs report because it concentrates on the overall costs of employing workers and cancels the noise of labor movements across industries and occupations.The ECI will be the last piece of critical economic data before the U.S. central bank decides its next move on interest rates.
Policymakers will conclude their two-day meeting of the Federal Open Market Committee (FOMC) on Nov. 1. The futures market is overwhelmingly penciling in a rate pause, leaving the target rate for the benchmark federal funds within a range of 5.25 to 5.5 percent, according to the CME FedWatch Tool. Most investors are anticipating another pause at the December FOMC policy meeting.
The Fed’s Summary of Economic Projections (SEP) forecasts one more rate boost this year, lifting the median policy rate to 5.6 percent.
But while financial markets believe that the institution is finished with rate increases, Fed Chair Jerome Powell warned that continued resilient economic data could warrant further rate moves to prevent a reacceleration of inflationary pressures.
“We are attentive to recent data showing the resilience of economic growth and demand for labor. Additional evidence of persistently above-trend growth, or that tightness in the labor market is no longer easing, could put further progress on inflation at risk and could warrant further tightening of monetary policy,” Mr. Powell said in remarks to the Economic Club of New York in early October.
Since the central bank launched its quantitative tightening campaign in March 2022, monetary authorities have attempted to achieve a soft landing. This would represent a goldilocks scenario for the economy that successfully eradicates inflation, maintains a robust labor market, and ensures modest growth. A chorus of banks and economists have argued that this could be achieved, with recession odds being trimmed.
At the same time, Mr. Powell has repeatedly warned that the economy needs to experience below-trend growth and soft labor market conditions to declare a mission accomplished on inflation.
Financial analysts are confident that the Fed is done with raising rates due to the plethora of headwinds, says Bryce Doty, senior vice president and senior portfolio manager at Sit Investment Associates.
“We expect that the Fed will be finished raising rates despite Powell probably hinting at the possibility of December increase,” Mr. Doty wrote in a note. “There are simply too many headwinds including a spike in 10- and 30-year Treasury yields; 8 percent mortgage rates; banks pulling back on lending; student loan payments, high gas prices, and spending all drawing down savings and wars.”
One area that several regional central bank officials, such as Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, say could help the Fed in its tightening efforts is the jump in Treasury yields.
Yields in the U.S. Treasury market are hovering around their highest level in 15 years, including the 2-year note, the benchmark 10-year, and the 30-year bond.
