Will a Fed rate pause incur additional inflation risk?
My last Inflation blog topic centered around Fed Chairman Powell’s upcoming (December) Federal Open Market Committee (FOMC) meeting, and his potential reaction to the stock market’s turbulence. We all now know his response to criticism from President Trump (who was said to be considering replacing Powell), Stock Market analysts like CNBC’s Jim Cramer (who complained that Powell was the cause of the stock market decline), and even some economists (who are concerned about a “hard landing” of the economy). Powell caved to pressure, and provided investors the soothing words of reassurance that the Fed would be sensitive to economic conditions and react accordingly. The FOMC press release also implied there would only be two rate hikes in 2019, versus the previously planned three (or four, if you include early 2020).
How would a Fed rate pause affect inflation? One of the factors that is affecting potential inflation is wage growth. As of the last jobs report, over 312,000 jobs were added to the economy in December (versus 167,000 expected). And with the unemployment rate at a 50-year low of 3.7%, the demand for skilled workers is driving salaries higher. In fact, the company where I work just provided a year-end salary increase to all of the engineers, in order to provide “market rate” compensation. In addition, our organization’s growth is being stunted by an inability to attract and retain qualified candidates. Wage growth price inflation is a very real possibility, and a pause in the use of the Fed’s main tool to “tap the brakes” of the economy could result in higher inflation.
Cleveland Fed President Loretta Mester even stated in a recent interview, that if inflation didn’t rise, then the Fed wouldn’t raise interest rates. So the question is, is inflation rising? Ask that question of a young parent with children living in Los Angeles, and they will tell you that Disneyland just raised their ticket prices last year by 18%, and are planning on raising them this year by another 25%! Ask that question of a college student, whose tuition and fees are going up and average of 8% per year (and in some areas twice that amount). Ask that question of a young family trying to buy a house, and they will tell you that it is hard to get on that 6% per year escalator, when their savings and their income can’t keep up.