Fast-rising wages led the Fed to raise higher interest rates

The fast-rising wages could lead the Fed to raise higher interest rates. The Labor Department data released on Friday stated the average hourly earnings soared to 0.7% in January.  In the previous 12 months, the average hourly earnings ran at a 5.7% pace. Going back to 2007 the fast-rising wages is the fastest-move by a wide margin. 

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Fast-rising wages led the Fed to raise higher interest rates
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The fast-rising wages could lead the Fed to raise higher interest rates. The Labor Department data released on Friday stated the average hourly earnings soared to 0.7% in January. 

In the previous 12 months, the average hourly earnings ran at a 5.7% pace. Going back to 2007 the fast-rising wages is the fastest-move by a wide margin. 

Fast-rising wages

Bank of America’s head of global economics research, Ethan Harris, said, “If I’m the Fed, I’m getting more nervous that it’s not just a few outliers. If I were the Fed chair, I would have raised rates early in the fall. When we get this broad-based increase and it starts making its way to wages, you’re behind the curve and you need to start moving.” 

Furthermore, the fast-rising wages have caused uncertainty for the Fed. Since the Fed faces difficulty dealing with inflation, it runs at its fastest pace in about 40 years. 

Aggressive Fed calls were made on Wall Street this year by BofA and Harris. The bank’s economists predict a seven-quarter-percentage-point rate hike in 2022 continuing for four more years. 

Ethan Harris also said, “The economy’s not just hitting the Fed’s goals, it’s blowing through the stop signs.” 

According to CME data, Harris continued saying he would not back off the call. Despite the markets presently providing a scenario of an 18% of happening. 

Fed moves faster to raise interest rates

As Harris points out that wages are soaring across various income classes, says, “The problem with the whole approach, and what’s got us calling for seven hikes, is the economy’s not just hitting the Fed’s goals, it’s blowing through the stops signs.”

The Fed deemed flexible average inflation allowing inflation to run at 2% to attain full employment. 

However, as inflation soared to 7% year-over-year, the labour market got tighter. The flexible average inflation led the Fed to play catch-up and raise interest rates faster. 

Industries with fast-rising wages

Since the pandemic, various industries were hard-hit and forced to shut down. However, while the hospitality and leisure sector suffered the most, their earnings soared 13% in the past year. 

As per the Labor Department, throughout 2021, workers changed or left jobs 47.4 million times. 

People were leaving their jobs in 2021 compared to the “Great Resignation” dating back to 2001. 

Nevertheless, the finance job wages rose to 4.8%, and retail pay soared to 7.1%. 

Goldman economists Joseph Briggs and David Mericle said in a note, “The great resignation consists of two quite different but connected trends: millions of workers have left the labour force, and millions more have quit their jobs for better, higher-paying opportunities. These trends have pushed wage growth to a rate that increasingly raises concern about the inflation outlook.” 

Lastly,

Goldman predicts the growth to slow down to 5% through the year. However, they also expect four rate increases in 2022. 

The economists said, “faster growth of labour costs than is compatible with the 2% inflation goal is likely to keep the FOMC on a consecutive hiking path and raise the risk of a more aggressive response.”

Also read – Fed Powell says, “we will raise interest rates if we have to”

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