Look for the statement following the May 1-2 meeting to affirm the Federal Reserve’s intention to raise short-term interest rates in June. The recent firming in inflation validates the Fed’s assumption that the slowdown in inflation last year was transitory. The Employment Cost Index picked up during the first quarter, another sign that the economy is delivering the warming trend in wages and inflation that members of the Federal Open Market Committee (FOMC) have been expecting. Most participants in the FOMC meeting expect to raise rates another two to three times this year. There are a few who would rather hold back but their ranks are shrinking along with evidence to back them. The vote this week on rates will be unanimous to skip a move in May but prepare the public for a rate rise in June.
Longer term, the FOMC is weighing how to communicate its goals, most notably on inflation. Look for debate about how members express those goals in the minutes to this May meeting to be released in three weeks. The Fed is rethinking the 2% inflation target. President John Williams of the San Francisco Fed is one of the most outspoken proponents of a price level target. That would allow for some catch-up in inflation following an extended period of undershooting and allow for gradual rate increases. A close ally of Chairman Jay Powell, Williams is slated to succeed the current president of the Federal Reserve Bank of New York when he retires in June; the New York Fed is the most influential in the Fed system because the president always has a vote in FOMC meetings, unlike the other 11 regional presidents.
Payroll employment is expected to rebound to a monthly pace of 200,000 for April, nearly double the initial total for March, which suffered from unusually bad spring weather. We do not expect the rebound to be large because weather disruptions persisted; a colder-than-usual Spring slowed the usual pickup in lawn care, seasonal plantings and outdoor repairs. Record snows blanketed parts of the Midwest in April.
The unemployment rate is expected to dip to 4% in April. Average hourly earnings should pick up 0.3% from March, which would bring the year-over-year rate up to 2.9%. Wages are firming as labor shortages force employers to pay more or work their existing labor forces harder. Many workers will be picking up extra shifts in the months to come; that should initially show up as modest improvement in productivity growth.
Employers in the transportation sector say that smaller firms are poaching their newly trained workers, particularly in the trucking industry where shortages are acute. Self-driving vehicles are not a near-term solution because such a shift would require a major commitment to infrastructure including sensors and cameras for roads and at intersections. That would be in addition to spending on urgent repairs to our crumbling infrastructure, so it’s not likely to happen. Ultimately, investments in technology could help employers to leverage worker skills and bridge the skills gap. So far, that investment has been lackluster.
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