Aug. 9 (Bloomberg) -- Federal Reserve Chairman Alan Greenspan and his colleagues at the U.S. central bank may have another reason to keep raising interest rates: a pickup in jobs and wages that threatens to spark inflation.
U.S. employers added 207,000 workers last month, the biggest gain in three months, while earnings rose the most in a year, the Labor Department reported on Aug. 5. Economists say further growth in employment and wages may change the outlook for inflation, which Greenspan said was ``well-contained'' in testimony to lawmakers last month.
``If you look at the underlying trend in labor costs and inflation, it's pointing upward,'' said Jan Hatzius, a senior economist at Goldman, Sachs & Co. in New York. The Fed cares about ``whether the labor market is getting too tight to keep inflation near 2 percent, and I think they're getting more concerned about that.''
The Fed today will raise its benchmark interest rate by a quarter point, to 3.5 percent, the 10th straight increase, according to all 71 economists surveyed by Bloomberg News.
Those boosts so far are achieving the Fed's inflation goal. Its preferred index of prices -- personal consumption expenditures excluding food and energy -- rose by 2 percent in the second quarter, unchanged from the year-earlier period.
Watching Language
Greenspan still warned last month of rising unit labor costs, a measure of wages and salaries per unit of production, as well as slower gains in productivity as possible precursors to faster inflation.
``Over most of the past several years, the behavior of unit labor costs has been quite subdued,'' Greenspan said on July 20 before the House Financial Services Committee. ``But those costs have turned up of late.''
At its last meeting on June 30, the policymaking Federal Open Market Committee raised the funds rate, the rate charged banks on overnight loans, to 3.25 percent and restated a plan to carry out further increases at a ``measured'' pace to restrain inflation.
Investors and economists will be watching to see whether the Fed changes the ``measured'' language in light of the recent job and wage reports.
``I wouldn't be surprised if they might like to change it,'' said Robert Dederick, president of RGD Economics in Hinsdale, Illinois. ``They may even regret having ever gone down this course.''
Unit Labor Costs
The Fed isn't likely to drop the language now, Dederick said. ``When you do something, there's always the risk that people will overreact once you stop doing it.''
Unit labor costs probably rose 2.9 percent in the second quarter, the median estimate of 51 economists in a Bloomberg News survey. That would be the fourth-straight quarter of growth at that level or faster, following three years of slower gains or declines. When labor costs rise faster than production, companies face pressure to increase prices.
``The Fed uses the job market and the wage rate as a sign of whether or not the economy is growing faster than its potential,'' said Brian Wesbury, chief strategist at Claymore Securities Inc. in Lisle, Illinois. In the Fed's view, ``there may be some magic level of unemployment when wages start to rise, and then that lets inflation out of the bottle.''
The unemployment rate in July remained at a four-year low of 5 percent.
More Rate Increases
Some economists forecast more rate increases than they had expected. The Fed will raise its benchmark rate to 4.25 percent by the end of next year's first quarter, a quarter-point more than predicted last month, according to 64 economists surveyed by Bloomberg News from July 29 through yesterday.
They also forecast the U.S. economy will grow by 4.1 percent this year, up from 3.5 percent in the previous survey, and said inflation will pick up.
The personal consumption expenditure index excluding food and energy rose at a 1.9 percent rate for the year that ended in June. That's close to the 2 percent high of the Fed's forecast range for 2005.
``We're well in the range where the Fed's going to be watching very closely for signs'' of wages pushing up inflation, said William Dickens, a senior fellow at the Brookings Institution in Washington, who served a year as an economist on former President Bill Clinton's Council of Economic Advisers.
Jobless Rate
There's disagreement on how far the jobless rate can fall before inflation accelerates. ``Economists really don't have a sharp read on that,'' Ben Bernanke, chairman of the White House Council of Economic Advisers, said in an interview last week.
The unemployment rate fell to a three-decade low of 3.8 percent in April 2000. The Fed's favorite measure of inflation was rising at the time, to 1.8 percent in the first quarter of 2000 from 1.4 percent a year earlier.
Dickens of the Brookings Institution said the jobless rate probably couldn't stay much below 3.5 percent without sparking inflation, though some economists ``still hold to numbers like 5.5 percent,'' Dickens said.
Janet Yellen, president of the San Francisco Fed, suggested in a July 29 speech that the unemployment rate below which inflation may accelerate is less than 5 percent.
The current jobless rate ``is relatively low,'' Yellen told community leaders in Portland, Oregon. ``At 5 percent, it's near most estimates of the so-called natural rate.'' Even so, ``some slack still remains'' in the labor market, she said.
Greenspan is skeptical of the idea that a single rate of unemployment nationally is the dividing line between stable and rising prices. In 1998, he told Congress that he was ``quite uncomfortable about the notion.''
