The inflation problem might be solving itself. But does the Fed see it that way?

The Federal Reserve announced a .25 percent interest rate hike on Wednesday afternoon, indicating that the Fed thinks that inflation is still too high but no longer the emergency it was last year. But, the Fed still indicated that some rate hikes could be coming in the future.

“The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time,” the Fed said in its statement announcing its decision. But exactly where rates will end up remains an open question.

Analysts noticed that the Fed said, “In determining the extent of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy,” instead of “the pace of future increases,” as it had said in past statements. This could mean that while the Fed could continue to hike rates, the end of that journey may be in a different place than it had thought in December.

While the Fed has acknowledged that inflation has slowed down from its summer highs of 9 percent to just under 6.5 percent, some members of the Fed’s board of governors and regional Fed presidents who sit on its policymaking committee still remain concerned about inflation — and the reason they’re concerned is because they’re worried that continued high wage growth means that inflation can’t come all the way down to its 2 percent target.

But the conventional wisdom — that a reduction in inflation won’t be possible without a substantial rise in unemployment — may be off.

The way Employ America economist Preston Mui and other analysts see things, it’s perfectly possible for wage growth to slow down without a spike in unemployment. In other words, the economy could cool off without unemployment having to spike.

While Fed Chair Jerome Powell has long pointed to the number of vacancies per unemployed person as a sign that the labor market is unsustainably tight, Mui points to other data showing that workers are now leaving their jobs less often than they were in the earlier post-pandemic period. (Remember “the great resignation?” It was really “the great job switching,” often coming with “the great pay raise.”)

“The Fed should not hike again. Their work is done. They have suppressed inflation expectations; the covid distortions to rents and margins are working through and will drive inflation down; and the labor market is re-normalizing without a surge in unemployment,” Ian Shepherdson, the chief economist of Pantheon Macroeconomics, tweeted Tuesday.

But the case for continued worry goes something like this: While inflation is cooling and even reversing in some categories (furniture, cars and rents, depending on what numbers you look at), wages are still growing at an unsustainably high rate. If wages continue to grow or even just stay at a high level, it will keep prices high in a broad chunk of the economy where wages make up a substantial portion of the price of a service. In this portion of the economy — think restaurants, healthcare, education — “the biggest cost, by far, in that sector is labor,” Powell said in a December press conference.

While normally a strong labor market and rising wages are good for workers, for the Fed, it can happen in a way that’s unsustainable, causing price increases for everyone.

Some Fed board members have recently acknowledged data showing wage growth slowing down but emphasized the need for continued vigilance.

“We need to see continued improvement across various measures of labor costs, because additional moderation is needed to bring inflation down to our 2 percent goal and because a significant escalation in wage growth could drive up longer-range inflation expectations,” Fed governor Christopher Waller said in a speech Jan. 20.

When the Federal Reserve last released its latest economic forecast, it projected that the reduction of the inflation measure it tracks to around 2 percent would be accompanied by an increase in the unemployment rate to 4.6 percent (in the meantime, it’s fallen to 3.5 percent), which could translate to around one million jobs lost. To critics of the Fed’s approach, this looked like the central bank planning on attempting to shut down inflation by plunging the economy into a recession.

And new data shows that the Fed’s main concern — rising wages — may be resolving itself without increasing unemployment.

“This was the last pixel of the picture that really confirmed what’s happening with wages; they’re slowing down,” said Nick Bunker, head of economic research at Indeed’s Hiring Lab. “Its’ pretty definitive, the debate’s over, wages are slowing down.”

A closely watched report on compensation costs for employers, the Employment Cost Index, produced by the Bureau of Labor Statistics showed that wage growth was slowing down at the end of 2022. Overall compensation costs (wages and salaries plus benefits) rose 1 percent in the last three months of last year, and growth in wages and salaries for a subset of private sector workers who don’t get incentive pay grew 5.2 percent from a year previous, compared to the 5.6 percent growth rate three months earlier.

“What we got with [the Employment Cost Index] is confirmation of what we’ve been seeing in other wage measures,” Mui said. “Wage growth and inflation can come down on its own without a recessionary rise in unemployment.”

“We’re seeing a labor market where the unemployment rate is quite low, but wage growth is slowing,” Bunker said, arguing that should alleviate concerns that wages and prices could spiral up together, leading to runaway inflation.

Hiring also notably slowed down, with net job creation falling from around 500,000 a month in the beginning of 2022 to around 200,000 by the end.

“The labor market is softening, there’s less churn in the labor market and wage growth slows down; it’s a natural sequence of events,” Mui said. “It’s hard to make case we need an increase in unemployment to bring wage growth to normal levels.”

“Not only is the immediate threat of inflation waning,” Bunker said, the new data combined with the low unemployed rate indicates that “there might be less of a cost to pay to get inflation” down to a lower level

The Fed appears to agree.

Thanks to Dave Tepps for copy editing this article.