SOLID JOBS DON´T PUT FED ON FIRM FOOTING / THE WALL STREET JOURNAL

Heard on the Street

Solid Jobs Don’t Put Fed on Firm Footing

Lackluster Wage Growth May Slow Any Actions on Rates

By David Reilly

Nov. 7, 2014 11:28 a.m. ET 
.

The Fed, led by Janet Yellen, may stay cautious as it deliberates when to raise its overnight lending rate in 2015 off the near-zero bound. European Pressphoto Agency


The Federal Reserve wants more inflation. To be specific, it wants wage inflation.

And it’s still not getting it.

Friday’s jobs report for October offered up some solid gains. Nonfarm payrolls increased by 214,000 and now have averaged 229,000 a month so far this year. The unemployment rate fell to 5.8%.

But the data were lacking when it came to wage growth. Average earnings for private-sector workers rose by just 0.1% versus the prior month, just half of what was expected. And, on a year-over-year basis, wage growth has stagnated at around 2% for five years. Adjusted for inflation, year-over-year wage gains have risen above 1% in just one month so far in 2014.

This indicates that despite the marked decline in the unemployment rate, now nearing Fed policy makers’ majority view for the fourth quarter of 2015 of 5.4% to 5.6%, there is still enough slack in the labor market that employers aren’t feeling compelled to pay employees more.

Granted, there is anecdotal evidence that momentum is building. The broader employment cost index is showing signs of life. And, as UBS economists wrote Friday, “Small firms are increasingly reporting wage increases and difficulty finding qualified workers, which suggests eventually increasing wage pressure in average hourly earnings.”

But given the economy’s recent history of false starts, the Fed could require firmer evidence to prod it into earlier or more vigorous action. That argues for the Fed staying cautious as it deliberates when to raise its overnight lending rate in 2015 off the near-zero bound. It also argues for it moving slowly once it takes that step.

This should reinforce the view that rates ultimately will settle at a peak that will be lower than in past cycles. Without an uptrend in wage growth in place, as Eric Green of TD Securities noted Friday, “the Fed will (and should) drag their feet in raising rates.”

The overall strength of the latest jobs report keeps the Fed on its current policy track toward increasing rates. But it isn’t about to board a fast train.