The wage increases reveal another “thorny” problem for the Fed

A closely tracked measure of wage growth hit its highest level in a year during the first quarter, raising concerns that flat inflation may be spreading and prompting the Federal Reserve to hold interest rates steady for longer than initially hoped.

New data released on Tuesday From the Bureau of Labor Statistics It showed compensation costs increased 1.2% in the first quarter, higher than the previous quarter's 1% increase and higher than economists' expectations of 0.9%, according to Bloomberg data.

Paul Ashworth, chief economist at Capital Economics North America, said Tuesday's data shows that wage growth is also “flat,” and not just the latest inflation data that showed price increases are not falling at the rate many had hoped.

“Continued wage growth is another reason for the Fed to take its time lowering interest rates,” Ashworth wrote in a note following the report’s release.

Markets moved after the print, with the 10-year Treasury yield (^TNX) adding about six basis points to 4.67% immediately after the Employment Cost Index (ECI) release, while futures contracts tied to the three major averages all fell.

Sarah House, chief economist at Wells Fargo Bank, said that all other things being equal, Tuesday's rise in wage costs is not the “end of the world” for the Fed. But it's another drop in the bucket that clouds the market's hopes for a rate cut before Federal Reserve Chairman Jerome Powell's next monetary policy update scheduled for Wednesday afternoon.

“It is another data point that suggests the inflation slowdown that began at this time last year has stalled in the first quarter of 2024,” House wrote in a research note following the report’s release.

Tuesday's data from the Employment Cost Index adds to the ongoing conversation about whether flat wage growth is contributing to persistently high inflation. Recent data from ADP showed that wage growth for private market job changers has risen in recent months while growth for those remaining in employment has changed little, a trend that ADP chief economist Nella Richardson said on Wednesday represents a “challenge” for ADP. Federal Reserve Bank.

Meanwhile, data from the Bureau of Labor Statistics revealed that year-over-year wage growth showed some signs of slowing, but was still viewed as too high to comfort inflation from returning to the Fed's 2% target, according to economists.

The core personal consumption expenditures index, which excludes the cost of food and energy and is closely watched by the Federal Reserve, rose 2.8% from a year earlier in March, higher than estimates of 2.7% and unchanged, new data showed on Friday. From the year-on-year increase we saw in February.

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During the first three months of the year, core personal consumption expenditures rose at an annualized pace of 4.4%, a “worrying” trend, according to Ben Ayers, chief economist at Nationwide.

This came after Federal Reserve Chairman Jerome Powell had already indicated that recent inflation data did not show the progress in rate increases that the central bank had hoped to see in 2024.

“We said at the FOMC that we would need greater confidence that inflation is moving sustainably toward 2% before it would be appropriate to ease policy,” Powell said on April 16, before March personal consumption expenditures data was released.

“Clearly, the latest data has not given us greater confidence and instead suggests that it will likely take longer than expected to achieve that confidence.”

Powell's comments contributed to investors' hopes for a 2024 rate cut fading. Going into Wednesday's Fed news conference, markets were pricing in nearly one rate cut this year, down from nearly seven cuts seen in early January, according to data Bloomberg.

This has sent Treasury yields higher, creating a headwind for stocks that has pushed the S&P 500 higher. First negative month since October Mike Wilson, chief investment officer at Morgan Stanley, said rising yields were likely to weigh on stocks “unless Powell surprises the dovish side at this week's Fed meeting.”

But given Tuesday's reading from the Labor Cost Index, as well as the rest of the data, economists don't see a dovish Powell as the likely outcome on Wednesday.

“There's not much the Fed can hang on its hat regarding the latest inflation data,” Brett Ryan, US economist at Deutsche Bank, told Yahoo Finance on Tuesday.

He added that Powell's message on Wednesday was likely to be that “higher inflation will be offset by keeping interest rates steady.”

Josh Schaeffer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.

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