GO
Loading...

What the Fed needs to worry about now: Pro

As Ben Bernanke prepares to preside over his final Fed meeting as chairman, his successor may have a full plate if the economic recovery accelerates enough to spur wage growth at a faster-than-expected pace this year, Pantheon Macroeconomics' chief economist told CNBC on Tuesday.

While too much wage growth may sound beneficial after the stagnant incomes of the past few years, it could be too much of a good thing for incoming Fed chair Janet Yellen, Pantheon's Ian Shepherdson said. Wages among civilian workers rose 1.9 percent in 2013 compared to the year before, according to the Bureau of Labor Statistics.

(Read more: Forget the State of the Union, focus on the Fed)

"So what I'm watching over the course of this year is what happens to those wage numbers," Shepherdson said on "Squawk Box." "History tells you that's what they care about more than anything else once the economy starts moving. They start to worry about wages."

(Read more: Fed taper will remain slow and steady: CNBC Survey)

Rampant wage growth, at more than 4 percent, could hinder Yellen's ability to to keep short- and long-term interest rates low, Shepherdson said, especially as the central bank reduces its monthly asset purchases. That ability could be "compromised pretty nastily," he said.

Proponents of the Fed's quantitative easing—which Shepherdson said he opposed during its first round—stopped waiting for payroll growth to pick up in the years since the 2008 financial crisis, Shepherdson. Instead they focused on "cumulative improvement" in the labor market, he said.

(Read more: Why inequality isn't a problem)

"The doves seem to be happy now that payroll growth has stabilized at a reasonable pace and they've given up on the idea of waiting for it to get better," Shepherdson said. "Now I actually think it will get better. … The bad outcome that I worry about—it's more of a story for next year than this year—is the idea that we get a real fast pickup in wage increases and pickup in rent, which is by far the biggest component of the consumer price index."

The Federal Open Markets Committee begins its two-day meeting Tuesday. Yellen takes the helm on Saturday.

—By CNBC's Jeff Morganteen. Follow him on Twitter at @jmorganteen.

Contact The Fed

  • CNBC NEWSLETTERS

    Get the best of CNBC in your inbox

    › Learn More