Dive Brief:

• The Federal Reserve on Wednesday will likely raise the main interest rate by a quarter percentage point, according to futures market trading, as wage gains exceed forecasts and help fuel inflation at more than double the central bank’s 2% target.
• U.S. companies plan to boost compensation 4.1% this year compared with 3.8% in 2022, Mercer found in a nationwide survey of 945 businesses in March. The finding aligns with a 12-month, higher-than-forecast 5.1% increase in wages and salaries in March among private sector workers, a data point closely tracked by the Fed.
• U.S. companies are enacting “the largest compensation increases we have seen since the 2008 financial crisis,” Lauren Mason, senior principal in Mercer’s career practice, said Tuesday, noting upward pressure on wages from a tight labor market, rising prices and transparency on pay levels.

Dive Insight:

Fed officials have sought since March 2022 to increase the federal funds rate enough to curb high inflation but not so much that they push the economy into recession. The prospect of achieving a so-called soft landing has become increasingly remote, according to recent data.

Price pressures persist despite the most aggressive monetary tightening in four decades. The Fed’s preferred measure of inflation — the core personal consumption expenditures price index excluding food and energy — rose 4.9% during the first quarter compared with 4.4% during the fourth quarter of last year, the Commerce Department said Thursday.

Meanwhile, economic growth on an annual basis slowed to 1.1% during the first quarter from 2.6% during the fourth quarter, and Fed economists in March forecast a mild recession later this year.

Despite recession risk, policymakers will probably push on with monetary tightening after having raised the benchmark interest rate at nine consecutive meetings to a range between 4.75% and 5%, according to futures markets trading.

Investors on Tuesday set 85% odds that the Fed will hike the main interest rate by 0.25 percentage point on Wednesday, the CME FedWatch Tool indicated.

Traders see 84% probability the Fed will then pause, leaving the federal funds rate unchanged at a range between 5% and 5.25% on June 14 after a two-day meeting, according to CME, which calculates expectations based on trading in interest-rate futures markets.

“We anticipate a final rate hike of 25 basis points in May,” EY-Parthenon economists said in a research report. “While the Fed will maintain its posture of ‘not even thinking about thinking’ about rate cuts in the coming months, we maintain our view that rate cuts are a strong possibility before the end of the year.”

Fed Chair Jerome Powell and other policymakers have tried to puncture expectations that they will soon reverse course while pledging to bring down inflation to their target.

“Monetary policy needs to be tightened further,” Fed Governor Christopher Waller said in a speech last month. It “will need to remain tight for a substantial period of time, and longer than markets anticipate.”

At the same time, Powell and other Fed officials noted before the failure of First Republic Bank on Monday that turmoil in the banking system during March may intensify a tightening in credit that began late last year and reinforce the central bank’s fight against inflation.

“Credit standards have risen over the past year and are expected to increase further in coming quarters,” San Francisco Fed President Mary Daly said last month. “Recent data on lending activity already point to declines in lending volumes in several sectors.”

The lending capacity of U.S. banks may fall 1% in 2023 as investors, responding to turmoil among midsize banks, pull back from the sector, the International Monetary Fund said last month before the failure of First Republic Bank. Tighter credit may reduce gross domestic product by about 0.44 percentage point.

A fall in job openings in March, as reported by the Labor Department on Tuesday, may indicate that inflationary pressure from the labor market is easing. Layoffs increased, job openings declined to the lowest level in more than a year and demand for workers fell more in line with the supply.

A loosening in the labor market will probably slow gains in compensation, Mason said in an email response to questions.

“We anticipate that annual compensation increases will remain elevated from what we have seen historically — traditionally around 3% — but likely not to the same level as we are seeing in 2023,” she said. “Labor shortages are likely to ease.”