American workers are still taking home pretty big paychecks. That sounds like good economic news. But don’t tell that to Wall Street.
The 5.1% increase in year-over-year hourly earnings that the government reported in Friday’s jobs report is a concern for investors — and Jerome Powell. The Federal Reserve may need to keep raising rates for a while longer if wage growth remains this robust. That’s because higher wages are a key component of inflation.
“Any idea that the Fed can make a meaningful shift is now called into question,” said Michelle Green, principal economist at Prevedere. Green said that as long as people are getting bigger pay bumps, they will likely keep spending at a healthy clip — which should in turn lead to more inflation pressure.
That could be problematic because it means the Fed may not be able to take its foot off the higher interest rate pedal just yet.
“The Fed is data-dependent. If inflation remains sticky, they will have to hike more,” said Priya Misra, head of global rates strategy at TD Securities. Misra thinks the Fed may keep boosting rates, which are now at 3.75%, until they hit 5.5%. That’s higher than what the market is expecting.
If the Fed has to keep boosting rates, the odds of a steeper economic downturn increase as well. “The probability of recession has also increased,” Misra said. “Investors are pricing in a benign recession but I’m not sure it’s gong to be shallow or short.”
Still, some are hopeful that the Fed will be able to threat the proverbial needle.
“The Fed wants below trend growth,” said Garrett Melson, portfolio strategist with Natixis Investment Managers Solutions, adding he is “not ruling out” the notion that the Fed can engineer a so-called soft landing.