Dive Brief:
- Growth in wages accelerated during the first quarter, underscoring the persistence of inflation and challenging Federal Reserve forecasts just weeks ago for three quarter-point cuts to the main interest rate this year.
- The employment cost index increased 1.2% during the first three months of 2024 compared with the prior three months, the Bureau of Labor Statistics said Tuesday. Over a 12-month period, wages rose 4.2%, well above the Fed’s 2% inflation target.
- “This report will be deeply unwelcome” to central bank officials, Pantheon Macroeconomics Chief Economist Ian Shepherdson said in an email to clients. “The ECI data will embolden the Fed’s hawks,” or officials who favor an aggressive stand against inflation. Policymakers began a two-day monetary policy meeting on Tuesday.
Dive Insight:
Many Wall Street economists and traders predicted in January that the Fed would make as many as six, quarter-point cuts to the federal funds rate this year.
In March, Fed officials forecast in a median projection that the central bank would trim the main rate in three, quarter-point increments in 2024. Since then, data has revealed a stubborn inflationary trend this year in prices paid by both consumers and producers.
The report on Tuesday of a rise in wages during Q1 prompted traders in interest rate futures to dial down bets on reductions in the Fed’s benchmark interest rate. They saw 30% odds that the central bank will cut the main rate this year by a half point, compared with 25% probability on Monday, and 27% odds of no reductions at all, according to the CME FedWatch Tool.
Traders also saw 40% odds that the Fed will make the first cut in the benchmark interest rate from a 23-year high at a September meeting, compared with 44% on Monday. The federal funds rate is currently at a range between 5.25% to 5.5%.
Persistent inflation was the leading cause for the dimming economic outlook among U.S. households this month, the Conference Board said Tuesday.
The board’s Consumer Confidence Index fell for the third consecutive month, hitting the lowest level since July 2022.
“Elevated price levels, especially for food and gas, dominated consumer’s concerns,” Conference Board Chief Economist Dana Peterson said in a statement. “Consumers became less positive about the current labor market situation and more concerned about future business conditions, job availability and income.”
The preferred inflation measure for the Federal Reserve — the core personal consumption expenditures price index excluding food and energy — increased 3.7% last quarter on an annualized basis, far beyond the central bank’s 2% target, the Commerce Department said.
“Inflation is the overwhelming trigger for consumer spirits and likely overshadows the labor market, which continues to offer strong employment opportunities and higher wages,” Robert Frick, corporate economist with Navy Federal Credit Union, said in an email.
Fed Chair Jerome Powell recently said that data this year has not bolstered optimism among policymakers that inflation is slowing at the steady pace needed to justify reducing borrowing costs.
“We've said at the FOMC [Federal Open Market Committee] that we'll need greater confidence that inflation is moving sustainably toward 2% before it would be appropriate to ease policy,” Powell said on April 16. “The recent data have clearly not given us greater confidence and instead indicate that it's likely to take longer than expected to achieve that confidence.”
Policymakers believe current monetary policy “is well positioned to handle the risks that we face,” Powell said. “If higher inflation does persist, we can maintain the current level of restriction for as long as needed.”
The central bank plans to release a statement at 2 pm Eastern Time on Wednesday, followed by a 2:30 press conference by Powell.
