Federal Reserve Chair Janet Yellen wants to see U.S. wages climb at a much brisker clip to boost consumer spending and help workers recoup ground they lost in the last recession, but she’ll have to fend off policymakers who fear that could cause inflation to surge.
As she seeks to maintain a consensus at the central bank, Yellen will have strong arguments in favor of nursing the recovery for longer and should be able to counter any calls for an early interest rate hike.
Research from the Fed’s staff and her own past academic work both suggest there may be more slack in the economy than inflation hawks believe, and that businesses in recent years have been slower to raise prices than they were previously.
If that is the case, then interest rates could remain lower for longer and inflation allowed to push beyond the Fed’s 2 percent target without fear of it losing control. It’s a policy Yellen has indicated she is willing to pursue to encourage wage growth and bring as many workers as possible back into the full-time labor market.
The connection between faster wage gains and a healthy jobs market is emerging as a core principle for the new Fed chief, who has said she expects pay to accelerate to something close to the long-run growth rate of 3 percent to 4 percent a year from the current level of around 2 percent.