Purple Prose in the Beige Book

More concern among regional Fed types over labor-market tightness.
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JACKSON HOLE, Wyo. -- Hey. Check this out.

The

Beige Book

released before the June

FOMC

meeting contained a couple of unambiguously strong statements about wages.

Labor markets remain very tight in almost all districts, with increased reports of upward pressure on wages in many parts of the country.

Persistently tight labor markets have resulted in many reports of increased wage pressures, especially for some specific industries and skilled occupations.

The

minutes of the June meeting -- a meeting that ended with a

bang -- show that those reports seemed relatively important to the Feds.

The concerns about the outlook for inflation tended to focus on the risk that, in the absence of an appreciable moderation in overall demands, very tight labor markets would at some point foster significantly faster increases in labor compensation that could no longer be offset by stronger productivity growth. Indeed, at recent rates of increase in output, labor utilization was likely to continue to rise, adding to pressures on costs. The higher labor cost increases would in turn generate more rapid price inflation. Members noted in this regard that the trend in average hourly earnings appeared to have tilted up in recent months. While this relatively recent development was not yet conclusive evidence of accelerating labor costs, especially without further information about productivity, anecdotal reports of faster increases in labor compensation also appeared to have multiplied.

In contrast, the Beiger

released before the May FOMC meeting contained a couple of clearly kind statements about wages.

Most Districts continue to report tight labor markets, but these conditions are apparently not often translating into higher wages.

Most Districts continue to report tight labor markets, but there were no reports of significant pickup in wage increases.

And the

minutes of the May meeting -- a meeting that ended with a

whimper -- show that those reports also stuck somewhat in Fed heads.

The latest statistical and anecdotal information on wages and prices, while somewhat more mixed than earlier, continued on balance to present a picture of benign inflation.

Well?

Is the Fed tipping its hand here?

The question assumes heightened significance in light of the Beiger

released yesterday. It contained the following statements about wages.

Many districts report a pickup in wage increases.

In most districts, the persistent tightness in labor markets continues to put upward pressure on wage increases.

These reports guarantee nothing (only The Best Fed Watcher Ever

knows with certainty what's going to happen a week from Tuesday), but they do cock an eyebrow in light of a key concern that was first mentioned in February -- "At some point, labor market conditions can become so tight that the rise in nominal wages will start increasingly outpacing the gains in labor productivity, and prices inevitably will then eventually begin to accelerate" -- and has only grown since -- "Price inflation was projected to rise somewhat over the forecast horizon, in part as a result of higher import prices and some firming of gains in nominal labor compensation in persistently tight labor markets that would not be fully offset by rising productivity."

And yes, the wages and salaries portion of the

Employment Cost Index

decelerated so much during the third quarter that it dragged down the overall index, but keep two things in mind.

(a) Benefit costs are accelerating at their fastest rate in more than four years. Note that the Beiger released yesterday mentioned "concern about sizable projected increases in the cost of medical benefits." And that "many companies expect double-digit increases in health care premiums for next year." And that "a few contacts reported that nonwage labor costs, particularly for health insurance, were rising noticeably." And that "contacts also note that health care costs are rising dramatically, and hikes of 10 to 15 percent are common."

(b) Because it does not include many of the nonwage items that broader measures do pick up -- things like hiring, retention and referral bonuses -- the ECI is growing more than a full percentage point slower than the better gauges of compensation (see this recent

column for a growth-rate comparison). Note that the Beiger released yesterday mentioned that "contacts report that upward wage pressures have picked up recently -- in some cases, wage increases are approaching 6 percent." And that "firms also continue to use cash bonuses to attract and retain workers." And that "some employers in the district are offering starting bonuses for entry-level retail positions." And that "many firms are paying existing employees commissions for finding new hires and that signing bonuses, stock options, and year-end bonuses are now a must in hiring skilled information technology workers."

Anyway.

It is never a good idea to base a policy-rate forecast on a single variable -- no one indicator can ever serve as The Guiding Light -- but the strong statements about wages from yesterday's Beiger certainly merit at least a little attention.

Side Dish

Of course, there always is the chance that the Lawrence Welk of central banking, Alan Greenspan, will keep the bubble machine going. Maybe, with the cover of the new GDP data, which imply an upward revision to past productivity growth, Greenspan and the Fed's Celtic coalition, McDonough and McTeer, will convince their FOMC brethren to cut interest rates next rather than raise them.

I doubt it. I just suggested it so that I could work in the "Lawrence Welk" and "Celtic coalition" remarks.

Thus chief domestic economist Paul Kasriel of Northern Trust.

We must recognize that what markets are pricing is anticipated Federal Reserve action. If the prices are right, we will act to validate them. If the prices are wrong -- built on the base on an incorrect view of the economy or Federal Reserve intentions -- we will prove them wrong and provide an anchor for the market to adjust to.

Thus Fed Governor

Meyer

on the

relationship between monetary policy and the bond market.

And hey. No column tomorrow. Away to the desert to gamble (and to bet on that silly horse race).

Good weekend.

Best breakfast?

A cup of Joe and a smoke.

Sausages (or any pork product) dunked in syrup.

Anything with eggs and cheese and meat and bread.

All of the above.

A glass of juice and a bowl of healthy cereal.