Federal Reserve officials were optimistic Feb. 2 about new data showing wages are rising at a quicker pace, with Federal Reserve Bank of San Francisco President John Williams also seeking to calm those concerned about a "knee-jerk reaction" from the Fed.
U.S. stocks fell sharply and the bond market saw a sell-off Feb. 2 after a report from the Department of Labor showed year-over-year wage growth of 2.9%, with some investors worrying about the Fed opting for more rate hikes than planned.
At separate events Feb. 2, Williams and Federal Reserve Bank of Dallas President Robert Kaplan said the wage data was consistent with what they would expect.
Kaplan told reporters in Austin, Texas, that he is now more certain that the Fed should raise rates three times, the amount that Fed officials have penciled in for 2018, according to Reuters. He has warned in the past that the Fed needs to be vigilant about possible overheating in the economy due to the effects of the tax cuts that Congress approved.
But Williams said at an event in San Francisco that he did not see signs of overheating at the moment and sought to calm those who are concerned about a "knee-jerk reaction" from the Fed, saying he and his colleagues are aware of the consequences of acting too quickly.
Williams said he expects the economy to grow by 2.5% again in 2018, noting he has upped his forecasts for U.S. economic growth due to factors like faster global growth and the effect of tax cuts. Still, he said in prepared remarks, he does not "see an economy that's fundamentally shifted gear."
"I am optimistic about the economy, but I expect continued moderate growth, with no Herculean leap forward," he said. "So given that the economy's performing almost exactly as expected, you can expect policymakers to do the same."
He also said at the event that the wage growth data reflects what he has heard from business leaders — that tightening labor markets are pushing up wages. The unemployment rate remained at a 17-year low of 4.1% in January, but Williams said data showing continued faster wage growth might take more time to show up because "wages don't get renegotiated every day."
"You have to be patient when you follow the macro economy," he said.
Meanwhile, Federal Reserve Bank of Minneapolis President Neel Kashkari, who dissented on the Fed's three rate hikes last year due to worries that inflation remained too low, said he was encouraged by the wage figures.
"This is one of the first signs that we're seeing wage growth finally start to pick up," he said in an interview with CNBC.
Kashkari also said if wage growth continues, it could "have an effect on the path of interest rates," though he did not give more details on whether he would support rate hikes from the Fed this year.
