Jay Powell's 90s dream is dead |  CNN Business

Jay Powell’s 90s dream is dead | CNN Business

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The US economy gained 263,000 jobs in November, 63,000 more than the consensus estimate. The biggest surprise was that the average hourly wage rose 0.55%, the fastest pace since January.

The strength of the job market is good news for American workers, but worrisome for the Federal Reserve and stock market bulls. This indicates that the Fed’s strategy of containing inflation by raising interest rates isn’t quite working and that more painful interest rate hikes are ahead.

What is happening: Managers often try to pass the cost of higher salaries onto their customers by raising the prices of their goods and services. When prices rise, workers often demand higher wages to keep up with the cost of living. And if they receive it, prices rise again to maintain corporate profits. It is the inflationary wage and price spiral that Fed officials are desperately trying to avoid.

The holy grail of economics is therefore often to keep wages high but prices low.

“To be clear, strong wage growth is a good thing,” Fed Chairman Jerome Powell told the Brookings Institution on Wednesday. “But for wage growth to be sustainable, it must be consistent with 2% inflation.” The year-over-year wage growth rate rose to 5.1% in November, more than double that target.

Returning to a sustainable level of wage growth and containing inflation will require a reduction in the demand for labour. But there were 1.7 job openings for every job seeker in October and the labor force participation rate has fallen, keeping competition for workers and wages high.

The dream is over: Over the past year, Powell has offered the optimistic view that wage growth could be reduced without dragging the economy into recession. An end to the pandemic would bring workers back to the margins and back into the labor market, he said, reducing the labor imbalance and easing inflationary pressures.

The idea came straight from the central bank’s playbook of 1994, when the Fed last tempered inflation and pulled off a soft landing.

But employment today is not what it was then. Baby boomers were at the height of their careers in the 1990s and immigration numbers were high. All of this led to an increase in the labor force which kept unemployment low even as interest rates rose.

Last week’s jobs report shows Americans are simply not returning to the workforce.

Powell seemed to finally acknowledge this during his speech last week, citing an excess of permanent pensions as baby boomers leave the workforce and the impacts of the long Covid take hold. Slower working-age population growth, a drop in immigration and an increase in deaths during the pandemic are also long-term downsides to the labor supply imbalance, he said. he declares.

In short, workers are in demand because there are fewer workers for everyone.

Powell also apparently acknowledged that his dream of a sudden increase in labor supply was over and that the path to lower interest rates while avoiding widespread job loss had narrowed considerably. scaled down.

“Despite some promising developments, we still have a long way to go to restore price stability,” he said.

Goldman Sachs has increased its earnings this year, but traders and salespeople at the investment bank will be battling for a bonus pool at least 10% lower than last year, according to a Bloomberg report.

Goldman began advising executives to expect the numbers to be cut by a “low double-digit percentage,” according to the report.

Investment bank Jefferies also warned staff this week that 2022 will be a “tough compensation season.”

The recent wave of gloomy warnings is part of a larger trend on Wall Street.

Overall, bankers who help consolidate businesses could see their bonuses fall by around 20% this year, while those who help companies raise new capital could see their pay fall by 45%, according to a recent report. report by compensation consultancy Johnson Associates.

“This year has been abnormally bad,” said Alan Johnson, managing director of Johnson Associates. “I think there will be a lot of unhappy people. Some people will look for other jobs… But there will also be layoffs.

The big picture: No one cries for bankers who earn starting salaries of around $200,000 before bonuses. But Johnson says you should be worried even if you don’t work in finance. Year-end payouts plummet as mergers and acquisitions dry up, inflation persists and the threat of recession increases.

“It’s a canary in the coal mine for the economy. If the canary dies, it’s not good for anyone,” Johnson said.

Global M&A volume was $642 billion in the third quarter, according to Refinitiv. That’s down 42% from the previous quarter and the lowest volume for that period in a decade.

A closely watched survey by the National Association for Business Economics found that the majority of their panel of economists believe there is a greater than 50% chance that America will experience a recession in 2023, most likely in the first quarter of the year.

“NABE survey participants continue to lower expectations for the U.S. economy, with projections of slower economic growth, higher inflation and a weaker labor market,” the NABE chair said. , Julia Coronado.

So what will take us there? More than two-thirds of those panelists said they believed the main factor in their bleak economic outlook was the Federal Reserve’s rate-hiking policy. Nearly 70% cited “excessive monetary tightening” as the biggest downside risk.

Darker : Less than a quarter of pessimistic survey panelists thought there was more than a 50-50 chance the economy would avoid a “severe recession,” and none of those respondents rated the likelihood of achieve a soft landing at over 75%.

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