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Continued wage increases could lead to more interest rate hikes

Americans experienced a 3.5% increase in average weekly earnings in the last year. Policymakers say this needs to come down to control inflation.
Continued wage increases could lead to more interest rate hikes
Posted at 11:44 AM, Aug 25, 2023

Americans continue to make more money. That should be good news, right?

According to Federal Reserve Chair Jerome Powell, those wage increases Americans have been getting in recent years will need to slow down in order for inflation to get under control. 

In prepared remarks on Friday, Powell said the Federal Reserve could continue fighting elevated inflation by increasing interest rates, which currently stand at a 22-year high. The current target interest rate is 5.25%-5.5%. 

Powell has said the Federal Reserve's goal is to get the annualized rate of inflation to 2%. Based on the latest consumer price index, inflation stood at an annual increase of 3.2% in July 2023.  Meanwhile, average weekly earnings increased 3.5% from July 2022 through July 2023. 

SEE MORE: Mortgage rates in US have reached their highest level since 2001

While Powell noted that there has been some decrease in wage pressures, progress needs to continue. 

"The rebalancing of the labor market has continued over the past year but remains incomplete. Labor supply has improved, driven by stronger participation among workers aged 25 to 54 and by an increase in immigration back toward pre-pandemic levels," Powell said. 

The Bureau of Labor Statistics noted that the U.S. workforce participation rate increased to 62.6% in July 2023, compared to 62.1% in July 2022. That has resulted in 3 million more people in the U.S. workforce this year compared to last year. 

But will a higher supply of workers result in a decline in wage hikes? 

"While nominal wage growth must ultimately slow to a rate that is consistent with 2% inflation, what matters for households is real wage growth. Even as nominal wage growth has slowed, real wage growth has been increasing as inflation has fallen," Powell said. 

Real earnings, which takes into account hours worked and hourly wages against the inflation rate, increased 1.3% from July 2022 through July 2023, according to the BLS. That means the average American gained buying power over the last year.

SEE MORE: The average American won't work for less than $78,645, data finds

But inflation has eased considerably from a peak of over 9% in the summer of 2022, meaning Powell and the Federal Reserve Board are taking a more cautious approach toward rate increases. 

"We will proceed carefully as we decide whether to tighten further or, instead, to hold the policy rate constant and await further data," Powell said. "Restoring price stability is essential to achieving both sides of our dual mandate. We will need price stability to achieve a sustained period of strong labor market conditions that benefit all."

The next time the Federal Reserve meets is Sept. 19-20, when interest rates could go up again. 

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