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Business News/ Opinion / Columns/  Wall Street’s big pay hikes have made the US Fed’s job harder
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Wall Street’s big pay hikes have made the US Fed’s job harder

Inflation and income divergences make easy money hard to justify

Lower earners usually bear the brunt of fast-rising price levels (Photo: Bloomberg)Premium
Lower earners usually bear the brunt of fast-rising price levels (Photo: Bloomberg)

For more than a year, an egalitarian narrative dominated the discussion about wages in the US. Lower income workers were seeing the biggest pay increases, while gains for better-paid employees lagged behind. But the quarterly results posted by banks last week may upend that dialogue, and when US Federal Reserve policymakers meet this week, they may feel additional pressure to keep broadening wage gains from adding to America’s already-high inflation.

The five biggest US banks boosted compensation by 15% last year, more than twice as much as consumer price inflation, with an expectation of more increases to come. JPMorgan Chase raised salaries for junior bankers for the second time in six months, and other banks made similar moves. What’s more, there were reports that those bankers occupying top-earning positions are seeing even bigger raises. At Goldman Sachs Group, some 400 executives who fill the investment bank’s highest rung are set to receive a special one-time reward in addition to annual bonuses.

It’s not just banking. Compensation for higher-skilled positions more broadly is starting to show rapid increases.

“We’re seeing some wage pressures at the end of the year that are stronger than they were in earlier parts of 2021," Nela Richardson, chief economist at payroll and human resources outsourcing company Automatic Data Processing, said in a Bloomberg Surveillance interview last week. “Industries that had a talent shortage before the pandemic are where we’re seeing the gains," said Richardson, “It’s not the industries that were hardest hit, like leisure and hospitality. It’s business services, finance, information tech. That’s where you are seeing double digit gains from a year ago as of December."

Anyone who gets a sizeable raise usually feels pretty good about it, and there’s nothing wrong with being rewarded well for working hard. But the fact that the well-off are once again coming out on top in an era of central bank largesse and yawning income inequality cannot sit well with the US Fed.

This reality should galvanize the central bank to tighten monetary policy more quickly and forcefully, which financial markets are expecting. Bond traders are pricing in three or four Fed rate hikes this year, the end of quantitative easing and the start of a reduction in the size of the Fed’s $8.87 trillion balance sheet.

However, many Wall Street analysts and arguably even stock investors haven’t fully bought into the actual amount of policy tightening likely to come. The longer that monetary policymakers wait, the more they risk inflicting damage on lower-income households, whose spending power erodes fastest when inflation accelerates.

This may already be happening. As George Saravelos, Deutsche Bank AG’s global head of currency research, wrote in a note on Friday, “Inflation is turning contractionary." He added that the consumer is “in trouble", with America’s real disposable income now 3% below its pre-covid trend and real wages deeply negative. In short, it’s getting harder for many families to afford basic items and they’re starting to cut back. “This is very different from the inflationary environment of the 1970s when real wages were growing sharply," Saravelos wrote.

After accounting for inflation, wages fell 2.3% in December, and have been negative since April, according to the US Labor Department. Although the Federal Reserve Bank of Atlanta’s Wage Tracker Index showed low skilled workers getting an average salary hike of 3.7% in the second half of last year, compared with the 3.5% increase for high-skilled workers, the two categories were seeing close to the same pace of compensation gains as of December. And, of course, all of those figures pale in comparison to the 7% consumer price inflation recorded last month by the Bureau of Labor Statistics.

Some may say the Fed should be patient since there are signs that the omicron variant of covid is weighing on the economy. Last week, the Labor Department showed that applications for state unemployment surged to a three-month high the prior week. And a few days earlier, a Federal Reserve Bank of New York gauge of manufacturing in the state plummeted to minus 0.7 for January from 31.9 in December. (Figures below zero indicate contraction.) But faster inflation itself is a liability for the American economy, as it crimps consumer sentiment and buying power.

The US Fed’s meeting this week must address divergent fortunes at a time of rapid inflation. It’s hard for the Fed to justify an easy-money policy when the wealthiest keep coming out on top, especially in the labour market, and those at the bottom feel the most pain.

Lisa Abramowicz is a co-host of ‘Bloomberg Surveillance’ on Bloomberg TV

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Published: 24 Jan 2022, 10:36 PM IST
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