A Wild Card in the Fed’s Outlook — Full Employment
Author: Greg Valliere
March 18, 2021
ACCOMMODATIVE MONETARY POLICY will persist for at least another year before the Federal Reserve takes a close look at its asset purchases; we get that. But there’s one overlooked wild card in the central bankers’ forecast.
IF THE UNEMPLOYMENT RATE really hits 4.5% by year-end, as the Fed predicted yesterday, there will be an inevitable debate by Thanksgiving about a labor market that is nearing full employment. In many industries — housing, shipping, technology, etc. — there’s full employment now, with growing labor shortages.
WE HAD THE GREAT HONOR to be trained by the late Fed Gov. Lyle Gramley, a brilliant pragmatist who passed along many lessons. One of Lyle’s most important lessons was that wage inflation can quickly become intractable. It usually is not transitory, like food or fuel inflation.
SO IF UNEMPLOYMENT PLUNGES FOR THE REST OF THIS YEAR, it makes sense that wage demands will begin to heat up. If wage demands heat up, can companies pass along higher prices to consumers?
OUR TAKE is that the public is so sick of lockdowns — and now flush with stimulus money — that people will accept higher prices at restaurants and hotels and dozens of other services where prices will have to rise to pay for higher wages.
WAGES MAY HAVE TO RISE as companies compete with $300 weekly Washington checks to people who may not be eager to return to work unless the money is clearly more attractive than the new unemployment benefits. And a rare bipartisan deal on a minimum wage hike is possible by fall.
OUR FEARLESS FORECAST IS AS FOLLOWS: Just as there’s a supply-demand issue in the red-hot housing sector, a supply-demand issue may begin to percolate in the labor market. If the jobless rate falls to 4.5% by year-end — and 3.5% in 2022, as the Fed now predicts — worker shortages in many industries could become a serious issue.
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