As U.S. strengthens, sluggish wages explain Fed's caution

Thu Jul 24, 2014 1:09am EDT
 
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By Jonathan Spicer and Ann Saphir

NEW YORK/SAN FRANCISCO (Reuters) - The U.S. Federal Reserve's policy statement, unchanged for the last four months, will probably stay that way until at least September for one main reason: slow wage growth.

Everything from job growth and inflation to manufacturing and retail sales are stronger now that U.S. economic growth has rebounded from a brutal winter. Some employers are even complaining about a lack of skilled workers, and surveys are showing businesses boosting compensation or planning to do so.

Yet Fed officials, who gather for a policy meeting July 29-30, are in no rush to talk about hiking interest rates because wage gains remain stubbornly low, raising questions about just how close the United States is to full employment.

While some of the more hawkish officials are anxious to tighten monetary policy and a number of private economists are warning the U.S. central bank risks falling behind on the inflation curve, Fed Chair Janet Yellen has signaled she will resist their pressure until the wage picture is clearer.

Data on Tuesday showed only a modest rise in core consumer prices and the Fed's preferred inflation gauge is still below target, giving Yellen breathing room to continue her very cautious steps toward a rate increase, probably next year.

In congressional testimony last week, she said the Fed was "closely watching" for signs of wage growth, which has been essentially flat so far this year despite strong jobs growth.

"There is some room there for faster growth in wages and for real wage gains before we need to worry that's creating an overall inflationary pressure for the economy," Yellen said.

After its meeting next week, the Fed's policy panel will likely nod to the hotter labor market and a fresh reading on growth due on Wednesday that is expected to show the economy expanded at a decent 2.9 percent annual rate last quarter.   Continued...

 
The sun rises to the east of the U.S. Federal Reserve building in Washington, July 31, 2013. REUTERS/Jonathan Ernst