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Labor Markets “Heat” Up. Did the Fed Make A Mistake in Easing Policy?


The November employment report revealed strong hiring across a wide-range of industries and the fastest wage growth of the current cycle. The surge in wage growth creates a new challenge for policymakers and it runs counter to the Fed’s narrative that tight labor markets are not pushing up labor costs.


And, add faster wage growth to the list of record equities and record debt growth that raises questions over whether the reduction in official rates in 2019 was warranted.


November payroll employment rose 266,000, the highest monthly job gains since January, with nearly 62% of all industries adding workers. Job gains in the prior two months were also were revised higher.


Overall monthly job growth has averaged 180,000 in 2019. Although that it somewhat lower than the 223,000 average monthly gains of 2018---it is still much faster than labor force growth, forcing companies to pay more for new workers.


That’s the “big” news from the employment report. Average hourly earnings for non-supervisory workers, the wage series that has been in place since the 1960s, shows wage growth of 3.7% over the past 12 months, That represents an acceleration of 50 basis points from the wage growth in 2018 and is not far from the 4% peak wage growth of the 2000's cycle.


Although policymakers do not align official rates to underlying trends in wage growth policymakers are well aware of labor costs trends---a key variable in their view of future inflation-- when making decision on the appropriate policy stance.


In normal economic times, especially when the nation’s jobless rate is low and labor shortages are plentiful as is the case today, official rates stand several hundred basis points above the growth in wages. Yet, today the funds rate target is 200 basis points below the growth in wages, a gap that existed in each of the past two recessions when companies were laying off workers and policymakers were trying to cushion the hit to the economy from rising joblessness and financial strains.


In recent FOMC meetings policymakers relied on the guidance from the financial markets----the slope of the yield curve---to assess the proper setting for the target on the funds rates. Yet, policymakers appear to have lost sight of how policy is affecting the real economy, and it is becoming clear from all sides---wages, equities and debt—that monetary policy is far too easy and official rate cuts in 2019 were unnecessary.

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