Renewed fears of sticky inflation have caused the 10-year Treasury yields to rise nearly 50 basis points and the S&P 500 Index to drop 4.2% in April. However, wage data shows a moderation in 2024, with average hourly earnings decreasing to 3.9% in April, signifying a return to the Federal Reserve’s 2% inflation target. This slowdown in wage growth suggests that policymakers may not rush to hike interest rates despite inflation concerns.
The current economic cycle is unique, with wage gains reaching a sustainable pace consistent with the Fed’s inflation target. These moderate wage increases are strong enough to support consumer spending, without sparking a wage-price spiral that would lead to tighter monetary policy. A balance has been struck where wages support spending, maintaining economic expansion without causing inflationary pressures.
The labor market today is vastly different from what it was in 2021 when the Fed raised interest rates aggressively in response to high wage growth. Back then, labor demand exceeded supply as the economy recovered from the pandemic, resulting in a surge in wages. However, the labor force has since grown, with more workers entering the market, restoring balance and alleviating wage pressures.
Immigration has also played a role in increasing labor supply, with additional workers entering the market. The Congressional Budget Office has revised its estimates of net immigration upwards, adding millions of potential workers over the next few years. This influx of workers should continue to keep wage gains in check, preventing runaway inflation.
Despite a series of inflationary releases in 2024, the labor market’s rebalancing and the moderation of wages should allow the Federal Reserve to remain patient. This development, while uncommon outside of a recession, increases the likelihood of a soft landing for the economy. Jeffrey Schulze, Director and Head of Economic and Market Strategy at ClearBridge Investments, believes that these changes in the labor market are positive and should help maintain economic stability in the future.
