Fed Considers Next Rate Decision as Wage Gains Pick Up

Inflation remained high to begin the year and wage growth remained above average, so it is likely that Federal Reserve policymakers will keep on raising rates next week in order to maintain the current trend.

Compared to the previous three months, employers spent 1.2% more on wages and benefits in the first quarter compared to the fourth quarter, a slight increase from the upwardly revised 1.1% increase in the previous quarter, the Labor Department said Friday. There was an improvement in the employment-cost index of 4.8% last quarter from a year ago, which was down from a gain of 5.1% at the end of last year.

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It was revealed Friday that the Federal Reserve's preferred gauge of consumer inflation, the personal consumption expenditures price index, slowed to 4.2% in March from a year earlier, according to a separate report from the Department of Commerce. This was lower than the month before when it rose by 5.1%, but it is still well above the central bank's target of 2%.

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Prices for food and energy, which have been volatile in recent months, rose 4.6% from a year earlier in March, just a fraction lower than the 4.7% that was recorded the previous month.

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The monetary policy committee meeting of the Fed is scheduled for May 2-3, and it will be one of the last major releases before the meeting. In each of the two meetings this year, officials have raised the benchmark federal funds rate by a quarter percentage point, bringing the benchmark rate to a range between 4.75% and 5% at the end of the year. Attempts have been made by the Federal Reserve to slow investments, spending, and hiring in order to fight inflation.

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The Fed has been forecast to raise its rate by another quarter-percentage point next week due to higher wage pressures to start the year, as well as other signs of stubborn inflation. Rubeela Farooqi, Chief U.S. Economist at High-Frequency Economics, said Friday that policy must remain restrictive for some time until inflation is convincingly moving towards its target.

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Before the latest figures came out, some central-bank officials had suggested that it was time to raise interest rates again. There seems to be no certainty as to whether the Federal Reserve will end its current tightening cycle this spring, according to economists, if inflation pressures and wage growth cool this spring.

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The level of inflation in the consumer sector has fallen from its recent peak set in June last year, but it remains elevated.

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The cost of wages and salaries also increased at the same rate as the cost of benefits during the first quarter, though wage costs have increased at a slightly faster rate over the past year. The most notable wage growth across all industries was seen in the in-person service sector, with construction, maintenance, leisure, and hospitality, as well as hospital workers, claiming some of the fastest pay increases over the quarter. Finance and insurance sector wages declined during the first quarter of this year, a further sign that the white-collar labor market is weakening.

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In general, there are signs that the economy is cooling, and a recession is expected to occur later in the year by many economists. The Commerce Department reported Thursday that heightened interest rates contributed to the slowdown of business investment and a decline in spending on home construction during the first three months of the year, in both areas affected by a slowdown in business investment.

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Despite a surge in consumer spending at the beginning of the year that propped up first-quarter growth, consumer spending has stagnated over the past two months after a surge at the start of the year. Despite a strong jump in consumer spending in January, U.S. household spending remained flat in March from the prior month and just up 0.1% in February, according to the Commerce Department, a significant slowdown from January's 2% increase.

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The household sector cut back on spending last month on goods, especially cars, as well as on necessary services such as housing, utilities, and healthcare as a result of curbing spending on goods.

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The labor market, on the other hand, has remained strong over the past few months. Although the number of job openings has decreased this year, they remain historically high, as does the number of workers quitting their jobs, suggesting that employees in some industries still have some power to demand raises.

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Since January, there has been a slight decline in hiring after a hot start to the year, and unemployment applications, an indicator of layoffs, have trended higher since then. As part of its previously announced plan to cut 7,000 jobs, the Walt Disney Company recently announced that it has started laying off workers at ESPN and other divisions as part of its layoff program. There have been a number of other companies that have announced layoffs in recent months, 

including the corporate parents of Facebook and Google, as well as Dow Inc. and 3M Co., two manufacturers.

The loss of employment has resulted in some workers being able to quickly find new jobs.

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Adrienne Baehr, who worked at Lucid Group Inc.'s electric-vehicle startup, lost her job when the company reduced its workforce by 18% in March. She was at the forefront of a wave of job losses in the automotive and tech fields, and she was worried that she would not be able to find a similar job in the future.

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“Initially, I was reduced to tears,” Ms. Baehr said when she discovered how many other tech recruiters had been laid off by the company.

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In a matter of weeks, she applied for nearly 20 jobs at various aerospace and defense manufacturers in order to find work there. Despite the perks of the job, she had to make some compromises: she had to take a slight pay cut and must now commute four days a week for an hour from her home in San Tan Valley, Arizona. Prior to this, most of her work was done remotely.

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As many other companies in the aerospace and defense sectors are doing, her company is hiring as well. "There is an abundance of industries that are not being affected by the wavering economy right now," according to Ms. Baehr.