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The 2021-2023 inflation surge saw sudden and persistent increases in prices for consumer goods, housing, and assets. Wage inflation also rose, but it lagged behind other inflation measures. When wages finally accelerated, the Fed began hiking rates to cool the economy, consistent with its longstanding view of wage inflation as a precursor to spiraling inflation and the need to suppress it.

At first glance, the average weekly wage for the last two decades appears strong, often outpacing general inflation. Data from the Center for American Progress indicate that workers, especially lower-income workers, have seen real gains between the COVID-19 pandemic and late 2024.

Yet these figures can be misleading. Recessions often skew the numbers because lower-paid workers are more likely to be laid off while higher earners remain, and new hires during recoveries can temporarily boost averages through starting pay or signing bonuses. Meanwhile, common inflation metrics like the consumer price index for all urban consumers can often understate the cost of living for lower-income households, and most wages remain below pre-pandemic levels. In fact, real hourly wages for most workers have barely moved since the 1970s and have typically been slow to recover once they fall behind.

While the Fed has long viewed suppressing wage inflation as central to stabilizing the economy and preventing runaway inflation, this was not always its primary mission. The Federal Reserve was founded in 1913 to prevent banking panics by providing liquidity to struggling banks, with its authority expanding dramatically during the Great Depression as it took on a central role in monetary policy, bank supervision, and financial system oversight.

The 1951 Treasury-Federal Reserve Accord restored the Fed’s independence to set interest rates after the government assumed control during World War II, allowing it to experiment with new monetary approaches. By 1958, the Phillips Curve began to be employed, suggesting a trade-off........

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