The chorus is growing for the Fed to cease and desist from raising short-term interest rates any further that have raised the borrowing costs of ordinary folk who depend on credit cards and auto loans for most of their purchases.
Why? Average hourly wages of employees are plunging after inflation in spite of the tight labor market, worsening the wage inequality of those workers that the Fed says it wants most to help.
Real average hourly earnings for all employees on private nonfarm payrolls decreased -3.0 percent from May 2021 to May 2022. The change in real average hourly earnings combined with a decrease of 0.9 percent in the average workweek resulted in a --3.9-percent decrease in real average weekly earnings (after inflation is factored in) over this period.
This is while the Consumer Price Index for All Urban Consumers (CPI-U) rose 8.5 percent for the year ending May 2022.
The reality wage-earners face is portrayed in the Bureau of Labor Relations average hourly earnings graph above. Average hourly earnings had soared to +7.6 percent in April 2020 at the beginning of the pandemic, which is what panicked the Fed since they maintain wage costs make up a major part of inflation.
But the inflation problem is due as much to continuing supply shortages, that periodically empty store shelves attest to.
The Fed Governors should recognize that businesses are hiring to meet the need for workers caused in part by the $1.2 trillion infrastructure bill, and Inflation Reduction Act, both designed to increase the supply of things needed in our growing economy.
So two arms of our government are in conflict, and it will be harder today to equalize the demand and supply equation than in past decades. The world was flooded with excess supply from Asian countries for decades that produced more than they could consume under the old free trade policies.
But protectionist policies are growing with post-pandemic economies wanting to protect their domestic producers with higher trade tariffs and lower import quotas. Now many of those cheap imports American consumers relied on will disappear, boosting consumer prices.
Nobel laureate Paul Krugman, who won his Nobel Price on the advantages of comparative trade policies—by countries concentrating on what they produce best—is even sounding the alarm that further rate increases could exacerbate wage inequality.
He cites Princeton economist David Autor’s recent study:
“For the first time in decades, wage inequality is falling. Real wages are rising among young, low-skilled workers and workers at the bottom of the wage distribution. While it is tempting to attribute the change to tighter labor markets, this may be an oversimplification.”
Given that the Fed Governors are saying they want to dampen hiring in the red-hot labor market, wage-earners will continue to take the hit.
And what are we to make of a predicted jump in fourth quarter GDP growth? We will know Thursday with the initial estimate of fourth quarter GDP growth is released.
The Atlanta Fed’s GDPNow prediction of Q4 growth was just increased to 3.5 percent and had been holding steady as more positive economic data came in. This could mean much stronger growth in early 2023 as I said in earlier blogs.
US economic growth is leading the recovery from the COVID pandemic. With the Ukraine War, declining world trade due to supply bottlenecks and growing protectionist trade policies, is the Fed doing the right thing?
Harlan Green © 2023
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen
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