雅虎香港財經 Wage increases reveal another 'sticky' problem for the Fed
A closely tracked wage growth metric hit its highest level in a year during the first quarter, fueling concerns that sticky inflation may be pervasive and prompt the Federal Reserve to hold interest rates steady for longer than initially hoped.
New data out Tuesday from the Bureau of Labor Statistics showed that compensation costs increased 1.2% in the first quarter, above the prior quarter's 1% increase and higher than the 0.9% economists had expected, per Bloomberg data.
Capital Economics chief North America economist Paul Ashworth said Tuesday's data shows that wage growth is "sticky too," and not just recent inflation data that has shown price increases aren't declining at the rate many hoped.
"The persistence of wage growth is another reason for the Fed to take its time on rate cuts," Ashworth wrote in a note following the release.
Markets moved following the print, with the 10-year Treasury yield (^TNX) adding about six basis points to hit 4.67% immediately following the Employment Cost Index (ECI) release, while all futures tied to the three major averages turned lower.
Wells Fargo senior economist Sarah House reasoned that all else equal, Tuesday's pickup in wage costs isn't "the end of the world" for the Fed. But it is another drop in the bucket weighing on the market's hopes for interest rate cuts ahead of Federal Reserve Chair Jerome Powell's next update on monetary policy slated for Wednesday afternoon.
"It is yet another data point that suggests the inflation slowdown that began this time last year stalled out in the first quarter of 2024," House wrote in a research note following the release.
Tuesday's data from the Employment Cost Index added to the ongoing conversation about whether sticky wage growth is contributing to persistently high inflation. Recent data from ADP has shown wage growth for job changers in the private market has picked up in recent months while growth for job stayers has been little changed, a trend which ADP chief economist Nela Richardson said on Wednesday proposes a "challenge" for the Fed.
Meanwhile, data from the Bureau of Labor Statistics has revealed year-over-year wage growth has shown some signs of cooling but is still viewed as far too high for comfort for inflation to return to the Fed's 2% target, according to economists.
New data on Friday showed the core Personal Consumption Expenditures (PCE) index, which strips out the cost of food and energy and is closely watched by the Federal Reserve, rose 2.8% over the prior year in March, above estimates for 2.7% and unchanged from the annual increase seen in February.
Through the first three months of the year, core PCE rose at an annualized pace of 4.4%, a "concerning" trend, per Nationwide senior economist Ben Ayers.
This came after Fed Chair Jerome Powell already noted that recent inflation data hasn't shown the progress on price increases the central bank hoped for entering 2024.
"We've said at the FOMC that we'll need greater confidence that inflation is moving sustainably toward 2% before it would be appropriate to ease policy," Powell said on April 16, prior to the release of the March PCE data.
"The recent data have clearly not given us greater confidence and instead indicate that it's likely to take longer than expected to achieve that confidence."
Powell's comments contributed to investors' fading interest rate cut hopes for 2024. Entering Wednesday's Fed press conference, markets are pricing in close to one interest rate cut this year, down from nearly seven seen in early January, per Bloomberg data.
This has sent Treasury yields soaring, creating a headwind for stocks that prompted the S&P 500's first negative month since October. Morgan Stanley chief investment officer Mike Wilson reasoned higher yields are likely to weigh on stocks "unless Powell surprises on the dovish side at this week's Fed meeting."
But given Tuesday's reading from the Employment Cost Index, on top of the rest of the data, economists don't see a dovish Powell as the likely outcome on Wednesday.
"There's not much for the Fed to hang its hat on in terms of recent inflation data," Deutsche Bank US economist Brett Ryan told Yahoo Finance on Tuesday.
He added that Powell's message on Wednesday is likely to be that "elevated inflation would be met with holding rates steady."
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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