Fed plays down worries of US labour shortagesHeat Profit
US employers are not yet bumping up against widespread labour shortages, the Federal Reserve said in a twice yearly report to Congress, suggesting it sees a jobs recovery that has room to run further.
Hiring has “continued apace” despite reports that employers are finding it harder to bring on qualified workers, the central bank said. “Even at the industry level it is difficult to see much evidence of emerging supply constraints,” the Fed found following an examination of a number of industries including construction, manufacturing, and health.
Speculation that the US labour Market is getting tight enough to trigger higher inflationary pressure has driven speculation in financial Markets that the Fed is preparing to accelerate its programme of rate increases. However if the Fed sees scope for further strengthening in the jobs Market, it will remain reluctant to stand in the way by tightening policy too aggressively.
In its report, the Fed found that the labour Market is now near or a little beyond full employment, but it noted that even in industries where hiring has slowed because workers are harder to find, such as transportation and hospitality, wage growth has remained steady or slowed.
The Fed noted that there are big disparities in outcomes between different racial and ethnic groups, as well as “striking” disparities between regions. For example, the employment-to-population ratio for working-age people has recovered much more sharply for people living in big cities than for individuals in non-metropolitan areas.
“While the aggregate labour Market appears to be modestly tight at the moment, not all individuals have benefited equally from these developments,” the report found.
The Fed’s twice yearly Monetary Policy Report comes ahead of testimony by Jay Powell, the new chairman, before the House and Senate next week. Mr Powell is now due to testify to the House financial services committee on Tuesday morning, instead of the previously scheduled Wednesday hearing.
It will be the first time he has addressed Congress as Fed chairman, and Markets will be watching extremely closely as Mr Powell gives his first indications as to the direction of policy amid a strengthening US economy and some tentative signs of higher inflation.
While the Markets were this month transfixed by a jump in year-on-year earnings growth to 2.9 per cent, the Fed’s report described rates of compensation gain as “moderate”, reflecting America’s poor productivity figures.
In a close look at inflation trends around the world, the Fed said that the fact that a number of advanced economies are experiencing low inflation could suggest “more persistent factors” may be restraining price growth. One possibility is the natural rate of unemployment — at which the jobs Market neither pushes up inflation nor holds it back — could be lower in some countries than many economists think.
In addition, slowing price growth in the medical sector is having a material effect on US inflation, even if it is not possible to predict how long this will persist. Technological changes — including the increased prevalence of internet shopping, which allows easy price comparison — could be holding back pricing power in many industries, the Fed said, although it also pointed out that it is hard to square this claim with high profit margins in the US.
The Fed’s report comes after a turbulent period in financial Markets, driven in part by speculation that higher inflation will prompt more rate increases than the three pencilled in by Fed policymakers in December.
The Fed’s report found that valuations are still “elevated” across a number of asset classes including equities and commercial real estate. Prices are higher than would be expected based solely on the level of longer-term Treasury yields, the report said.
Vulnerabilities in the financial sector are low because of strong capital and liquidity ratios at the banks, and if interest rate were to rise unexpectedly lenders’ strong capital should help insulated them against declines in securities prices, it said.
However, the report found that debt has been increasing among some non-banks, pointing to an increased provision of margin credit to hedge funds.