[Economics] Powell’s Luck on Wages Is Running Out, Expert Says

[-_-Moltres-_-]

 

Top Stories Bank of Japan Governor Kazuo Ueda discussed yen moves with the premier and said he’s carefully watching the impact on prices. Australia’s central bank kept interest rates at a 12-year high, while Sweden’s Riksbank will decide tomorrow on whether to start cutting. Rising prices in the UK hospitality sector are complicating the Bank of England’s path to cutting rates. Tougher Task Many economists anticipated that bringing down high inflation would come at the cost of significant damage to the labor market. But so far, Federal Reserve Chairman Jerome Powell has been able to make notable progress at minimal cost.His luck may be about to run out. That’s according to noted workplace economist and Hoover Institution senior fellow Steven Davis. He argues that the extraordinary forces that helped to hold back wage gains coming out of the pandemic — particularly the explosion in work-from-home — are now dissipating. “The developments came at a fortuitous time for the Fed and its effort to dis-inflate,” Davis told a monetary policy conference at Hoover, in Stanford, California, last week. Those forces “have largely played so we shouldn’t count on them going forward.” Powell has repeatedly stressed that the Fed targets prices, not wages, as it seeks to rein in inflation without triggering a recession. Nevertheless, he did suggest last week that pay gains may need to cool further for the central bank to achieve its 2% inflation target.By offering employees the opportunity to work from home, companies were able to pay their workers less than they would have had to do in a tight labor market, Davis said. Drawing on responses from surveys of businesses in 2022, he reckoned that that dynamic could have moderated labor-cost increases by roughly 2 percentage points. That restraint was in addition to a drag on pay coming from an expansion of labor supply as Americans who had dropped out of the workforce because of fears of catching Covid-19 returned, according to Davis. That shift was particularly evident among less educated and less well paid employees, along with the elderly. “This worked to help to bring inflation down without generating much unemployment,” Davis said, adding, “I think this process is essentially played out.” If he’s right, Powell may face some turbulence ahead as he attempts to engineer a soft landing for the world’s largest economy. The Best of Bloomberg Economics Richmond Fed President Thomas Barkin said he expects high rates to slow the economy further and cool inflation down to the 2% target. China’s hints at a plan to fix its property woes have buoyed investors. But economists want more details before buying into the recovery story. German factory orders unexpectedly dropped in March — pointing to persistent weakness in a sector that’s already been lagging. Official statisticians are managing to lure more young Britons to take part in a key labor market survey that’s critical for BOE rate-setters. Dovish policymakers are gaining power at Brazil’s central bank after four appointments by the government President Luiz Inacio Lula da Silva. Thailand’s new finance minister urged the central bank to support government policies, signaling pressure may continue for rate cuts. Need-to-Know Research The pile of excess savings accumulated by US households during the pandemic — when they weren’t able to get out and spend so much and were receiving extraordinary federal income assistance — has finally become depleted, analysis by the San Francisco Fed suggests.“The latest estimates of overall pandemic excess savings remaining in the US economy have turned negative, suggesting that American households fully spent their pandemic-era savings as of March 2024,” economists Hamza Abdelrahman and Luiz Oliveira said in a blog post.The duo have been updating their estimates regularly over time, and last year flagged that the US savings surplus was lasting longer than previously expected, helping to bolster spending. Coming Up Qatar Economic Forum: On May 14-16, join heads of state, global business leaders and technology innovators in Doha to identify solutions to the major issues driving global boardroom conversations. Learn more here.

https://www.bloomberg.com/news/newsletters/2024-05-07/world-economy-latest-powell-s-luck-on-wages-is-running-out-expert-says