Moderate Rise in U.S. Labor Costs Signals Possible Fed Rate Cut

U.S. labor costs saw a moderate uptick in Q2, with private sector wages growing at their slowest rate in 3.5 years, signaling a potential interest rate cut by the Federal Reserve. The Labor Department's report aligns with recent data showing a notable cooling in inflation trends.

U.S. labor costs rose moderately in the second quarter as private sector wages saw their slowest growth rate in over three years, according to a report from the Labor Department released on Wednesday. This development adds to evidence pointing to a significant cooling in inflation trends and could pave the way for an interest rate cut by the Federal Reserve come September.

The report arrives on the heels of last week's data showing inflation had considerably subsided last quarter, with all measures dipping below 3%. Federal Reserve officials, who are concluding a two-day policy meeting, are likely to welcome the modest labor cost rise. The central bank is expected to maintain the benchmark overnight interest rate within the 5.25%-5.50% range, a position it has held since last July.

"Wages and salary increases in private industry are more in line with where Fed officials would like it to be," said Christopher Rupkey, chief economist at FWDBONDS in New York. "The economy is gradually returning to normal. Cooler wages give the green light to Fed rate cuts." The employment cost index (ECI), which is considered the broadest measure of labor costs, climbed 0.9% last quarter, following an unrevised 1.2% rise in Q1.

(With inputs from agencies.)