Manufacturing and wages growing in the Midwest, Fed says

Federal Reserve Bank Chicago
People walk by Federal Reserve Bank of Chicago on LaSalle St., Chicago (Jingnan Huo/MEDILL)

by Jingnan Huo

The Midwest saw robust manufacturing growth and a tight labor market with increasing wage pressures at the end of 2016, in line with national trends, according to a Federal Reserve report issued Wednesday.

The report, known as the beige book, is a collection of anecdotal data from all 12 Federal Reserve district banks and will be used by Fed officials to prepare for the next interest rate policy meeting in two weeks.

Survey respondents in the Midwest reported continued strong growth in auto and aerospace industries, and moderate growth in most other industries. Higher wages were noted in particular for jobs that require highly skilled workers. Many respondents also pointed to rising health care costs.

“The labor market is tight with a really low unemployment rate and that is adding to upward pressure on wages, and that translates into higher inflation, slowly but surely,” said Michael Gregory, deputy chief economist at BMO Capital Markets.

Nationally, while manufacturing sales increased and employment grew, growth in the energy industry was mixed, according to the Fed’s beige book. Financial conditions were stable. Firms across the country and industries were said to be optimistic about growth in 2017.

Also on Wednesday, Federal Reserve Chair Janet Yellen said that Fed policy-makers were expecting to increase the overnight federal funds rate target a few times a year until it reaches the Fed’s 3 percent goal, which is expected by 2019. The Federal Open Market Committee will next meet on Jan. 31-Feb. 1.

“Waiting too long to begin moving toward the neutral rate could risk a nasty surprise down the road–either too much inflation, financial instability, or both.” Yellen said in a speech in San Francisco. “Now, it’s fair to say, the economy is near maximum employment and inflation is moving toward our goal.”

On Dec. 14, 2016, the Fed raised its overnight rate by a quarter of a point to a range of 0.50-0.75 percent, the second time in the past decade. The first time was a year earlier on Dec. 16, 2015.

Yellen’s comments seemed to suggest that she’s “signing off” on several rate hikes this year, Gregory said.

Members of the FOMC give their interest rate forecasts every three months and these are plotted on a graph dubbed the “dot plot” that does not reveal the author of each dot.

The graph released after last month’s Fed meeting showed that some Fed officials expect three rate hikes in 2017.

“I guess [Yellen] is on the side of three,” Gregory said.

word cloud Yellen speech Fed
In Yellen’s speech, the word “inflation” was mentioned 17 times, “interest rate” 22 times.
Photo at top: The Federal Reserve Bank of Chicago contributed to the Fed’s beige book report, released Wednesday. (Jingnan Huo/MEDILL)