Long Term Perspective

Federal Reserve officials closely monitor the employment cost index, which measures total compensation costs. Compensation includes wages & salaries as well as benefits. Compensation costs moderated sharply in 2002, then again in the first half of 2005 after remaining stable in the two previous years. Both wages & salaries and benefits rose rapidly in 2006 and remained high during the first half of 2007.

Short Term Perspective

The employment cost index rose 3.3 percent in the third quarter of 2007 versus year ago levels while wages and salaries also posted a 3.3 percent gain. Tight labor markets have resulted in faster gains in wages and salaries in recent quarters. Accelerating compensation costs have been a concern for Fed officials during 2006 and early 2007 and will continue to play a role in determining whether or not the Fed will ease the funds rate target further in 2008.