If last week's shocking crash in the Employment Cost Index (ECI) to the smallest increase on record [6], was enough for some to seal the deal that the Fed will not hike rates for the balance of 2015 (and perhaps ever), here comes the Fed's unofficial mouthpiece, WSJ's Jon "Stingy Consumers" Hilsenrath, to debunk any such speculation with a note which likely came straight from the Fed titled the "Fed Doesn’t Demand Wage Growth Before Increasing Interest Rate [7]."
Here is how the Fed is willing to goalseek its constantly shifting "data dependency" just so it can hike rates at least 1-2 times in a rerun of "ghost of 1937 [8]" before it can then unleash a repeat of the "1939" scenario or worse.
Federal Reserve officials have fuzzy views on how wage growth fits in with their objectives for the economy. They would like to see wages growing faster. It would give them confidence that the economy is closer to their dual goals of producing healthy job growth and modestly rising inflation. But the linkages between wages, jobs and inflation are unclear, and so they’re not banking on faster wage growth materializing.
It gets better: the Fed which has been "convential data dependent", is now suggesting the conventional data has been all wrong.
In classical models of the economy, as the unemployment rate falls, slack in the job market diminishes, producing upward pressure on wages. Because wages are such a large component of business costs, wage pressures in turn get passed on to consumers in the form of higher consumer prices. But a growing body of research suggests the economy hasn’t been working like this for decades. Other factors — including global pressures, in addition to household and business views about the stability of inflation — have large effects that potentially outweigh any impact from domestic wages on prices.
Enter the goalseeked "explanation" why suddenly wage growth does not matter:
A recent paper [9]by Fed board economists Ekaterina Peneva and Jeremy Rudd finds little evidence that the ups and downs of wages had large effects on broader consumer price trends either before or after the 2007-2009 recession. “Wage developments are unlikely to be an important independent driver of (or an especially good guide to) future price developments,” they conclude.
So what would the Fed want you to know as a result of all these conflicting data points? Here is the mouthpiece again:
Ms. Yellen said explicitly in that March speech that she is prepared to start moving interest rates up even before she sees sure signs that wages are rising faster. “That said,” she added, “I would be uncomfortable raising the federal funds rate if readings on wage growth, core consumer prices, and other indicators of underlying inflation pressures were to weaken.”
Given her stance, Friday’s employment cost report doesn’t look like a deal breaker for the Fed in its long-running debate about when to raise short-term interest rates. Wages appear to be stagnant but not clearly weakening, which is what she set out as her threshold for not acting. Still, it creates new doubts for officials and doesn’t help them build the confidence they’re hoping to build that the job market is nearing full employment and inflation rising toward 2%.
The September policy meeting is thus shaping up to be a cliffhanger for the Fed and markets. Officials could decide they want to take a bit more time to makes sense of all of this. Still, other evidence could emerge before then that convinces them to look past the report and act on rates. This coming Friday’s jobs report, and its measures of average hourly earnings of workers, now becomes all the more important for the Fed in its continued search for evidence that the economy is truly on the mend.
So another "most important jobs report ever" coming up. Great.
One thing that Hilsenrath did not touch upon however, is that there are only 3 months left before it snows. And everyone know by now the Fed never hikes when it snows. Inquiring minds want to know how the climatic conditions factor into the Fed's thinking. We are confident Jon can relay the Fed's position on US weather forecasts shortly.
