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No let up, or pick up, for the Fed
Burst of job growth doesn't necessarily mean the central bank will get more aggressive.
March 4, 2005: 12:39 PM EST
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NEW YORK (CNN/Money) - Those looking for signs of inflation won't find it in Friday's February job report, despite a big jump in payrolls.

Which means it's nearly a sure thing that the Federal Reserve will stick with its measured pace of quarter-percentage point rate increases in the coming months, economists said Friday.

The economy created 262,000 jobs in February, the second strongest month for job growth over the last 10 months and about double January's revised gain in payrolls, the Labor Department said. The February number topped economists' forecasts for about 225,000 new jobs, according to Briefing.com.

The Fed, the nation's central bank, started raising its target for a key short-term interest rate shortly after job growth boomed for three straight months last spring. So it might be expected that Friday's big jump in payrolls would spark more aggressive rate hikes from the Fed.

But average hourly and weekly wages were flat last month, as were average hours worked, according to the department's report. Over the last 12 months hourly wages are up 2.5 percent while weekly wages are up only 2.2 percent -- a lack of inflationary pressure that should keep the Fed on its current path, according to economists.

"I think this is the best of all possible worlds for the Fed," said Anthony Chan, senior economist for JPMorgan Fleming Asset Management. "They'd like to see the economic expansion sustained without the side effect of higher inflationary pressure from wages."

While higher wages are good for workers, and can boost economic growth by giving them more money to spend, that in turn can feed inflation as demand strengthens -- for goods and for labor.

Chan said that strong wage growth in the employment report is an early warning system for the Fed.

"About 70 percent of the average cost of producing a product is wages," said Chan. "Wages are one of the early factors that determines what happens to CPI," or the Consumer Price Index, the government's main gauge of inflation at the retail level.

If a stronger job market starts forces wages higher, with employers forced to pay more to attract workers, the Fed would feel compelled to raise rates more aggressively in a bid to cool economic growth, which could eventually hurt employment. So it's good news for investors, if not for workers, to have wages stay flat.

"I don't' think we've seen any sign here that there is an urgency to risk damaging the pace of the upturn," said Steven Wieting, senior economist at Citigroup. "Why rush, why panic?"

Economists said wage growth is likely to stay modest as employers are still reluctant to hire, even with the economy growing at a solid clip. Only last month did employment reach January 2001 levels.

"Even though it's improving, there's still an awful lot of people who dropped out of work force and are waiting to be pulled back in," said Bill Cheney, chief economist for John Hancock Financial.

Continued competition from overseas markets and a rising trade gap are also helping to keep wages in check, according to University of Maryland Professor Peter Morici, who noted that wage gains are trailing inflation.

"Until the administration addresses the trade deficit, employment may grow but workers will continue to receive lower and lower wages," he said. "Rising imports, record trade deficits and the pressures of Asian competition are denying American workers the benefits of their accomplishments."

For more on the outlook for jobs, click here.  Top of page

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