The United States could be on the verge of a worrisome surge in wages if unemployment continues its downward trend, based on research Dallas Federal Reserve Bank President Richard Fisher presented to his colleagues at the Fed's policy-setting meeting this week.
An unpublished paper prepared by his staff showed "declines in the unemployment rate below 6.1 percent exert significantly higher wage pressures than if the rate is above 6.1 percent," Fisher told Reuters in an interview Friday.
Fisher said he had his staff analyze state-by-state unemployment and wage data from 1982 to 2013 to try to figure out why wage inflation is emerging in Texas but not elsewhere in the nation.
The results, he said he told his colleagues, are "noteworthy and need to be thought through."
The U.S. unemployment rate in August was 6.1 percent, exactly the point below which his staff's research showed wages could start to take off.
"The number just happened to be 6.1 percent - it is what shook out of the data," Fisher said.
The Federal Reserve, which has kept short-term interest rates near zero since December 2008, is expected to begin to tighten policy next year. The precise timing will depend heavily on its assessment of the labor market, which the Fed this week said continues to fall short.
"There are still too many people who want jobs but cannot find them, too many who are working part time but would prefer full-time work, and too many who are not searching for a job but would be if the labor market were stronger," Fed Chair Janet Yellen said.
Strong job growth in Texas has brought the unemployment rate there down to 5.1 percent. The Dallas Fed estimates current Texas wage inflation at about 3.5 percent, higher than the estimated state-wide inflation rate of 2.5 percent, he said.
The Fed targets a U.S. inflation rate of 2.0 percent.
Fisher said on Friday he worries that further declines in unemployment nationally could lead to broader wage inflation. To head that off, and also to address what he called rising excesses in financial markets, Fisher said he prefers to raise rates by springtime, sooner than many investors currently anticipate.
"I’d like to do it in a slow and gradual way, rather than rapid and sharp," he said. "Historically within the Fed, whenever we’ve waited til we believe we are at some measure of full capacity utilization and then we’ve raised rates, every time we’ve done it we’ve brought about a recession."
(Reporting by Ann Saphir; Editing by Andrea Ricci)