Although the Fed has been quite reluctant to raise interest
rates sharply over the past few months, new labor statistics data might just
allow them to gradually increase the rates in the next few months. 173,000 workers
were added by the employers to their payrolls in August, below the average of
247,000 for the preceding year. This helped bring the unemployment rate down to
5.1% from 5.3%, close to the natural rate of unemployment. However, if this
trend continues and that rates drop even further, the Fed’s models predict that
wage growth and inflation will increase. So Fed might just be a little more
willing to discuss about increasing the interest rates in their next meeting.
Concerns and uncertainties still remain. Some Fed
researchers have said that the fall in equilibrium employment with a decrease
in the labor bargaining power might have caused unemployment to go down compared
to historic rates. If workers have less bargaining power, then unemployment may
continue to fall even further without causing wages to go up. Inflation
expectations, global uncertainty, and market volatility just add on to the
list. All we can do now is wait and see how the Fed handles the situation. The
outcome of the mid-September meeting will be something to watch out for.
2 comments:
The Fed should consider two factors might be skewing the inflation rates. Firstly, low oil prices have kept costs down on altitudes of products and services throughout the economy which will curb inflationary pressure. Secondly, real wages have barely increased in recent years which is also an important factor. Wage growth is usually a substantial culprit of inflationary pressure and without it, there is much less pushing prices up.
coupled with the fact that unemployment has dropped in recent times it is interesting to see if the increases its interest rates. Inherently the impact on inflation might be substantial or volatile. However; the significance of real wages remaining the same is also a statement in terms of the nature of the current inflation rate.
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