This chart explains why interest rate cuts will be delayed

in #economy9 months ago

The Federal Reserve (and other central banks) firmly believe that wage growth feeds into inflation. They will hold off cutting interest rates till wage growth moderates. Here is the graph of US wage growth:


source

As you can see, wage growth is sharply above it's pre pandemic levels.

What will drive wage growth lower? An increase in the labour supply; getting inactive people and early retirees to come back into the labour market, and importing migrants. The other option is increasing automation and use of AI instead of hiring people; we can see this already in the IT and tech sector.

It takes months for these trends to play out. I don't think we'll see an interest rate cut till just before the US election.