Higher wages in the United States will not necessarily lead to faster inflation, Dallas Fed President Robert Kaplan said in Frankfurt on Wednesday.
His comments countered widespread market speculation that the briskest wage growth in almost nine years in the United States would drive up inflation, paving the ground for further policy tightening by the Federal Reserve.
“Were facing wage pressures right now in the United States because of a tight labor market,” Kaplan, a dove and a non-voting member of the Fed’s policy committee, told an audience in Frankfurt.
“I am less convinced that this will necessarily translate into higher prices because businesses have much less pricing power,” he added.
Among the factors curbing pricing power, he cited technological advances such as cloud computing, which allowed smaller companies to break into concentrated markets.
Expectations of higher Fed rates have been credited for contributing to a market rout earlier this week, which saw U.S. stock indexes post some of their biggest daily drops since the financial crisis.
Kaplan said he did not expect the market gyrations to have repercussions on the economy and described them as a “healthy” corrections from high valuations.
Still, he cautioned the Fed should continue reducing its monetary accommodation to avoid the build-up of excesses.
“If you have significant enough overshoot of full employment, history shows that usually other excesses and imbalances build,” Kaplan said.
“It’d be wise for us to be removing accommodation, although in a patient and gradual manner.”