Why Wages Never Rise

Because any hint of wages increasing along with productivity result in the Federal Reserve trying to shut it down.

The Fed has been promulgating low wage economics for decades:

There have been all kinds of carefully phrased semi-hawkish statements emanating from carefully contained semi-hawkish Fed governors recently. Today, Dallas Fed President Robert Kaplan repeated what he has been saying for a while – that the “base case” should be three rate hikes this year, and that there could be four, warning, “if we wait to see actual inflation, we’ll be too late.”

But it’s the most fervent “doves” – when they start getting cold feet as doves – that matter the most when it comes to tightening monetary policy.

One of the most persistent, most vocal doves on the policy setting FOMC has been Minneapolis Fed President Neel Kashkari. He voted against all three rate hikes in 2017, and was vocal about why he did: inflation was too “low.”


There was a number in the jobs report this morning that got his attention: Average hourly earnings in January gained 2.9% year-over-year, the largest gain since June 2009, hallelujah, finally. Pressures are building up in parts of the economy, and companies are griping they cannot hire enough workers in some professions – or that they would have to pay more, God forbid, to hire them.


“The most important thing that I saw in a quick review of the jobs data is wage growth,” Kashkari told CNBC on Friday.

“We’ve been waiting for wage growth. Everyone has been declaring that we’re at maximum employment. More Americans have been coming in, which is a really good thing. But there hasn’t been much wage growth. This is one of the first signs that we’re seeing wage growth finally starting to pick up. That’s good for the public as a whole. I think it’s good for the economy overall. But I do think if wage growth continues, that could have an effect on the path of interest rates.”

The path of these interest rates is already winding uphill. For now, everyone at the Fed when they advocate for higher rates keeps repeating the qualifier, “gradual.” But so far, Kashkari has used every opportunity to vote and speak out against any and all rate hikes.

Yet the moment wages tick up, suddenly it gets his attention. It gets every Fed governor’s attention. Wage increases give them the willies.

Creating asset price inflation, including the most glorious housing bubble imaginable, became the Fed’s publicly stated policy goal under Chairman Bernanke – his infamous “wealth effect” doctrine. And consumer price inflation must always be high enough to eat up wage gains and help companies show growing revenues, but not so high that it blows down the whole house.

But wage inflation is toxic for the Fed. Wage inflation means that people get paid more for the same amount of work. A higher income due to promotions, for example, is not part of wage inflation.

Expect rates to go up much more rapidly now.

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