WASHINGTON: Federal Reserve chairman Jerome Powell (pic) has avoided the gaffe his United Kingdom counterpart made last month but he’s delivering much the same message: Wages are growing too fast for the good of the economy.

       While Bank of England governor Andrew Bailey sparked a minor firestorm when he suggested workers shouldn’t ask for big wage increases – UK labour unions tore into him for his remarks –

       Powell’s description of a “tight to unhealthy” job market on Wednesday made barely any waves.

       Behind the comments by the monetary policy makers: Concern that super-tight labour markets are fuelling outsize wage gains, hindering their efforts to reduce surging inflation.

       As Bailey’s experience showed, delivering such a message can be politically tricky, especially at a time when many workers are struggling to pay more for gasoline, food and housing.

       “The promise of wages moving up is a great thing,” Powell told reporters on Wednesday after the Fed raised interest rates by a quarter percentage point and signalled six more to come this year.

       “But the increases are running at levels that are well above what would be consistent with our 2% inflation goal over time.”

       Wages rose at a year-on-year rate of 5.8% in February, the fastest pace in data going back to 1997, according to calculations by the Federal Reserve Bank of Atlanta.

       That’s markedly above the roughly 4% level that would be consistent with 2% inflation and 2% growth in worker productivity.

       The Fed sees inflation, as measured by the personal consumption expenditures price index, falling to 2.7% by the end of next year and 2.3% by the close of 2024, according to the median forecast of policy makers released on Wednesday.

       The figure was 6.1% in January.

       As Powell suggested, that’s probably not doable unless wage gains slow. But it’s not clear how that would come about if the labour market stays as tight as policy makers expect.

       They forecast unemployment will fall to 3.5% by the end of 2022 from February’s 3.8%, then basically hold at that level through 2024.

       That’s below the 4% mark they reckon is consistent with maximum employment in the longer run.

       “It’s fanciful to think that we don’t see an increase in the unemployment rate,” given the impact that the Fed’s planned rate increases will have on the economy, said Diane Swonk, chief economist at Grant Thornton.

       Central bankers are loath to predict higher unemployment, for obvious political reasons. Former Fed vice-chairman Donald Kohn recalls an instance when Alan Greenspan suggested joblessness might rise in an appearance before Congress.

       When he returned to the office after getting pushback from lawmakers, the then-Fed chairman told Kohn that he wasn’t going to do that again.

       Another reason not to forecast higher unemployment: An increase in joblessness usually signals the onset of an economic downturn.

       The economy historically “has always ended up in a full-blown recession” whenever unemployment has risen by more than 0.3 percentage point, former New York Fed president William Dudley, a Bloomberg Opinion columnist, has noted.

       Powell is hoping an increase in labour supply will help relieve some of the upward pressure on wages, without necessitating a rise in the unemployment rate.

       “It’s a really attractive labour market for people,” he said. “And once – you know as we get past Covid well and truly, it becomes an even more attractive one.”

       The problem – as Powell himself acknowledged – is that the Fed has been expecting a big increase in labour-force participation for months as fears of catching the coronavirus eased, and it hasn’t come through.

       “We’ve gotten much less than expected,” he said. “It’s not easy to predict these things.”

       At 82.2%, the participation rate for workers age 25 to 54 – also known as prime age – is above its pandemic low of 79.9% and in line with its average this century.

       But it’s below the 83.1% level from January 2020, before Covid-19 forced a shutdown of much of the economy.

       Powell is also betting that the Fed’s coming rate increases and a slowdown in the economy will cool companies’ demand for workers.

       The aim: Ease the pressure that firms face to boost pay and raise prices to cover higher labour costs, without triggering layoffs and higher unemployment.

       Right now, there are 1.7-plus job openings for every unemployed person.

       “That’s a very, very tight labour market,” the Fed chairman said.

       “Tight to an unhealthy level, I would say.”

       Given that emphasis, Wrightson ICAP LLC chief economist Lou Crandall said that the monthly jobs opening report may figure more prominently in the Fed’s thinking going forward than even the closely-watched employment report that shows the jobless rate.

       “Seeing a decline in that ratio for surplus job openings is going to be critical,” Crandall said.

       Powell told reporters repeatedly on Wednesday that the economy and labour market were strong enough to withstand a removal of Fed support.

       “The objective is to achieve price stability while also sustaining a strong labour market,” he said.

       Some economists have their doubts that’s doable. “The history of being able to guide inflation down from 40-year highs with maximum employment suggests a smooth landing is very difficult to achieve,” said Matthew Luzzetti, chief US economist at Deutsche Bank Securities Inc.

       “At some point they will face the trade-off between pushing unemployment higher or accepting higher inflation.” — Bloomberg