When the Federal Reserve suggested it could continue its sharp rate hikes in November and December, the markets plummeted on mounting recession fears. A survey of 400 CEOs shows a staggering 91% believe a recession is bound to happen within the next 12 months. Some analysts believe wages and employment don’t have to come down to bring down inflation, but others disagree, including Fed Chairman Jerome Powell. Straight Arrow News contributor Larry Lindsey explains why he thinks wages need to slow down before price inflation is under control.
Wages have risen at an annual rate of about five and a quarter percent over the last year. The Atlanta Fed Wage Tracker said they’re rising at about a 6.7% rate over the last three months. This is very quick. You have to convince people that wages are going to come down before they actually do and the way you do that is first you have to overshoot and cause a recession. And the recession — companies get less demand for their goods.
When they get less demand for their goods, the first thing they’re going to do is take down those “help wanted” signs. Right now there are 11 million open jobs in America. Only after those come down will they begin layoffs. After all, I’ve been looking for workers for so long, if I’ve got one who’s functioning on the job, I’m not going to lay her off or him off until I’m really sure that I’m not going to need them.
And then it’s only when those layoffs stop that workers get nervous and start demanding lower pay increases. This is a long process. And until you get wage disinflation, because it’s the biggest component of all costs, you’re not going to get a lot of price disinflation. In the end, the Fed is acting tough. The reason they have to act tough is they missed the boat the last time. They’ve been too easy for too long. And so they’re trying to make up for past mistakes. But toughness is about endurance and staying power. It’s not about heavy lifting at one or two meetings.