Fed Chair Warsh Dismisses Wage Gauge, Calls for New Cost Model
New Fed Chair Kevin Warsh announced he will stop using the traditional wage-share metric to gauge inflation pressure, urging a redesign of the underlying cost model.
During his Jackson Hole address, Federal Reserve Chair Kevin Warsh declared that the wage-share indicator, long used to assess inflationary pressure, will be dropped from the Fed’s toolkit. He argued that the metric cannot tell whether a wage increase stems from higher productivity or from firms’ pricing power, which have opposite implications for marginal cost. Research by Takushi Kurozumi and Willem Van Zandweghe at the Federal Reserve Bank of Cleveland identified a “markdown gap”—about 35 cents per marginal dollar in manufacturing—that distorts the labor-share reading.
Warsh said the Fed will work on more reliable models and rules, and his policy task force will consider adding the gap as a separate cost term. Critics warn that continuing to treat the labor share as a cost measure could trigger unnecessary rate hikes and job losses. The shift marks a significant rethink of how the central bank interprets wage data in its inflation forecasts.
Why it matters
Accurate cost measurement is crucial to avoid needless rate hikes that could harm employment.
How the sides frame it
LOW AGREEMENTCenter coverage frames Warsh’s appointment as a dramatic, welcomed ideological shift toward monetarism, while right-leaning coverage treats the announcement as a technical policy change, noting the abandonment of the wage-share gauge and warning from critics.
CENTER
Warsh’s rise is portrayed as a major, celebrated move toward monetarist thinking at the Fed.
RIGHT
The story is presented as a policy-technical shift, dropping the wage-share metric and introducing a new cost model, with critics cautioning about the change.
The right emphasises
- dropping the wage-share indicator from the Fed’s toolkit
- developing more reliable models and adding a "markdown gap" cost term
- critics warning about treating labor share as a cost measure
How this story developed
- Sep 11 US 10-year Treasury yield nears 5% as oil prices surge and rate-hike bets rise
- Sep 16 The Federal Reserve announced a quarter-point increase in its benchmark rate, marking the first hike since the previous administration and the first under Chair Kevin Warsh.
- Sep 16 The Fed announced a quarter‑point increase to its key interest rate.
- Sep 17 Fed increased the federal funds rate by 25 basis points to a 3.75‑4 percent target range in its first hike since 2023, with a 12‑0 vote.
- Sep 17 The Bank of Japan will raise its policy rate to 1.25% on Friday, the highest level in 31 years, as it seeks to counter rising inflation and a weakening yen.
- Sep 17 The Federal Reserve lifted its policy rate by a quarter point, its first increase in three years.
- Sep 18 Fed officials indicated that at least one more 0.25‑point rate increase may be implemented before year‑end.
- Sep 18 The BoJ is scheduled to raise its policy rate to 1.25% on Friday.
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