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This is a rather shocking data point:

The ECI is widely viewed by policymakers and economists as one of the better measures of labor market slack. It is also considered a better predictor of core inflation. Wages and salaries, which account for 70 percent of employment costs rose 0.2 percent in the second quarter. They had increased 0.7 percent in the first quarter. Private sector wages and salaries also rose 0.2 percent after gaining 0.7 percent in the prior quarter. In the 12 months through June, labor costs rose 2.0 percent, the smallest 12-month increase since last year, and slipping further below the 3 percent threshold that economists say is needed to bring inflation closer to the Fed’s 2 percent medium-term target.

Is it the reason stocks rose a few minutes ago? Nominal wages are probably the single best indicator of whether money is too easy or too tight. It’s one that Janet Yellen pays a lot of attention to. If the fed funds target was currently 3.75%, this data point might push the Fed to cut the target rate. Should the IOR rate now be cut to zero, or even to negative 0.25%?

I’m not quite sure what the Fed should do, because I don’t know what they are trying to achieve. But if you assume their goal is a labor market that is neither unusually loose or tight, and 2.0% PCE inflation, then the new wage numbers suggest a rate cut is probably appropriate.

PS. It was the slowest reported wage hike since records began 33 years ago.

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This entry was posted on July 31st, 2015 and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response or Trackback from your own site.



