Monday, August 14, 2017

Fed President Sees Rebound in Inflation and Modest Wage Growth

Officials reinforce Fed's gradual policy-tightening plan

Author: David Schwartz J.D. CPA

New York Federal Reserve President and CEO William Dudley says he and his Fed colleagues anticipate U.S. inflation to rise gradually over the next several months as the labor market is expected to continue heating up. These trends, Dudley says, support the Fed’s near-term policy tightening. In the New York Fed's August 10, 2017 Regional Economic Press Briefing, Dudley called on the United States to better address factors driving racial inequality of employment and income, and he also suggested the Fed was planning to raise interest rates once more and begin reducing some bond holdings this year. 


The focus of Mr. Dudley's Regional Press Briefing was on labor inequality and the continued sluggish growth of wages since the financial crisis. He sees more robust labor markets as the key to improving the overall well-being of average Americans.


“Stronger labor market conditions are perhaps the best means to improve the economic well-being of most Americans, particularly those who have been struggling and are most vulnerable to economic downturns.”


But Dudley identified structural issues like globalization and technological change as being the chief drivers in wage inequality in the U.S. 


"In my view, two main factors are responsible for this pattern of differential wage growth and the resulting increase in wage inequality.  First, advances in technology have dramatically changed the nature of work, increasing the skill requirements for many jobs while displacing others.  Second, the pace of globalization has accelerated in recent decades, with increased cross-border trade, investment, immigration, and the emergence of global supply chains.  Together, these economic forces have contributed to significant job losses in certain sectors, most notably manufacturing.  The resulting decline in demand for middle- and lower-skilled workers has resulted in fewer jobs and has depressed wages for many in those industries."


While the Fed’s application of monetary policy cannot change things like globalization and technological innovation, Dudley believes that the Fed is uniquely suited to study the effects these forces are having on labor markets and “inform the debate” on how to address income inequality. This includes promoting policies to better educate U.S. workers, and provide them more economic mobility by encouraging the improvement of overall workforce development. Dudley called issues of economic inequality and mobility “among the most important that we face as a nation.”


"Monetary policy can help support economic growth, but it is much less powerful in addressing the structural factors that underpin inequality in the labor market.  That said, understanding the causes and consequences of economic inequality is important to the Fed.  We are working hard at producing research, information, data, and analysis so that we can better understand inequality and participate in an informed debate on how to best address it.  One significant initiative within the Federal Reserve System is the creation of the Opportunity and Inclusive Growth Institute at the Minneapolis Fed.  The Institute conducts research to measure, analyze, and make recommendations to improve the economic well-being of all Americans, with a particular focus on structural barriers that limit full participation in economic opportunity and advancement.”


Incidental to his comments on wage growth and addressing income inequality, Dudley also hinted at the Fed’s expectations in for labor and inflation in the short term. 


"Our outlook anticipates a continued moderate growth trend, with some further strengthening in the labor market and an increase in inflation over the medium term toward our objective of 2 percent.”  


This trend, Dudley said, reinforces the Fed's gradual policy-tightening plan.


The full text of Mr. Dudley’s August 10, 2017 briefing may be viewed via: