Wall Street’s big payday makes Fed’s job harder

For more than a year, an egalitarian narrative dominated the discussion about US wages. 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 the dialogue.
The five biggest American 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 & Co. 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 Inc., 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. “Industries that had a talent shortage before the pandemic are where we’re seeing the gains. It’s not the industries that were hardest hit,
like leisure and hospitality. It’s business services, finance, information tech – that’s where you’re seeing double digit gains from a year ago as of December.”
Anyone who gets a sizable raise usually feels pretty good about it, and there’s nothing wrong with being rewarded 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 can’t sit well with the Fed.
This reality should galvanise the central bank to tighten monetary policy more quickly and forcefully, which the market is 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 stock investors — haven’t fully bought into the amount of policy tightening likely to come. The longer policy makers wait, the more they risk inflicting damage to lower-income households, whose spending power erodes fastest when inflation accelerates.
Some may say the Fed should be patient since there are signs that the Omicron variant of Covid-19 is weighing on the economy. The Labour 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.

—Bloomberg