📝 Fed Will Need to See Labour Cost Within 3.0-3.5% Range: Wells Fargo

Our framework of wage pressures shows the probability of "high" wage growth in the year ahead fell for the fourth straight quarter to 47%, with "high" wage growth defined as a yearover-year increase in average hourly earnings of 2.9% or higher (one standard deviation above last cycle's average of 2.4%). The probability of "normal" wage growth—defined as 2.0-2.8%, or within one standard deviation of last cycle's average—picked up to 51%. The third quarter marks the first time in two years that the probability of "normal" wage growth exceeded "high".

Factoring in the recent trend in productivity, labor cost growth remains too high to be consistent with the FOMC's 2% inflation goal (chart). Moreover, we believe Fed officials will need to see labor cost growth reach the ~3.0-3.5% range consistently before feeling confident that inflation can return to 2% on a sustained basis. Therefore, any policy easing remains distant in our view. That said, the moderating trend in labor cost growth alongside signs of a further slowdown to come over the next few quarters suggests little need for the Fed to tighten policy further from here, and we continue to believe that the current hiking cycle has come to an end.

- Wells Fargo