The US economic recovery has been missing one thing: a clear sign of accelerating wage growth.
While there have been anecdotes and reports of wage growth here and there, the overall picture remains ambiguous. And the lack of inflation in consumer prices suggest there’s little pressure from wages pushing up the price of goods and services.
Wage growth is critical when thinking about monetary policy, argues DoubleLine’s Jeff Gundlach.
“It’s one of the best indicators of the Fed,” Gundlach said during a presentation on Tuesday at the New York Yacht Club.
Since the financial crisis, the Federal Reserve has kept short-term interest rates near zero in its effort to stimulate the economy. Most economists believe the Fed will begin raising its benchmark fed funds target rate later this year as it tightens monetary policy. This would have the effect of causing short-term interest rates to rise, which would also help to offset rising inflationary pressures.
Gundlach sees little urgency for the Fed to raise rates because, among other things, wage growth remains very low.
During his presentation, he shared this chart of hourly earnings growth and the fed funds rate from market veteran Gerard Minack, something Minack shared with Business Insider earlier this year.
“The Fed has a form starting a tightening cycle when wage growth picks up,” Minack told Business Insider. “So far in this cycle, wage growth has been remarkably stable (and low). Several leading indicators suggest that wages should accelerate thought this years. If that happens, then the Fed will likely stay on course to tighten conventional policy mid-year. But if wages don’t budge, neither will the Fed.”
“For the Fed to raise rates, this blue line has to move up,” he said.
The latest monthly update on hourly earnings will be released by the Bureau of Labour Statistics on Friday in the April jobs report.