Wage Inflation Cools – The Fed’s Potential Pause for Rate Hikes
Despite the overall consensus of a Federal Reserve interest rate hike by 25 basis points, there is still much debate to be had on when they will pause these rate hikes and begin to transition to cuts. One key area that the Fed usually looks toward is the labor market, and recently, new data within the labor market may have the potential to influence their decision in pausing the rate hikes by the spring of this year. In the United States, wages and salaries increased by 1% in Q4 relative to Q3, a hopeful sign that wage inflation has peaked. Now as the Fed is targeting a “soft landing” for the economy, several believe these numbers may be convincing to pause rates as soon as after the next meeting on March 22nd. Currently, the majority of investors are led to believe that this upcoming meeting and the next will be comprised of two subsequent 25 basis point raises, reaching a peak federal funds rate of 4.75% to 5.00%.
Although this is not the only metric the Fed will be looking at over the next several months, it is one of great importance as it can leave hints into the chances of a recession. From another perspective, a 1% quarter-over-quarter increase could be interpreted as high, seeing that the Fed targets a 2% level of inflation. If the central bank does decide to impair the labor market even more to reach this desired level of inflation, this could certainly increase the chances of a recession exponentially. Over the next several days, investors should listen in on the press release from the Federal Reserve and the actions the other central banks decide on, seeing if there is any clear growing contention that a tightened rate cycle may subside soon.
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I am not a financial advisor and my comments should never be taken as financial advice. Investments come with risk, so always do your research and analysis beforehand.
