Net Net: Promoting innovation and managing change
Net Net: Promoting innovation and managing change

How your bum paycheck is helping the Federal Reserve

How low wage growth helps the Fed

As price pressures build in the U.S. economy, the Federal Reserve is likely to have a more difficult time justifying its ultra-easy interest rate stance.

But here's one suggestion: The central bank simply could use the moribund state of wage inflation, as opposed to general prices, as its justification to keep short-term rates extremely low for a prolonged period of time, according to an analysis from Goldman Sachs.

"Increased emphasis on wage inflation can be beneficial even when there is no uncertainty around the amount of slack in the labor market," Goldman economist Sven Jari Stehn wrote this week in an analysis for clients. "The intuition is that wage inflation normalizes more slowly than price inflation ... and focusing on wages might thus be a way to introduce a 'low for longer' commitment into policymaking."

While the Fed unwinds its monthly bond-buying program known as quantitative easing, keeping interest rates low will remain the centerpiece of its efforts to steer the economy back to recovery.