US & Americas Political Macro Commentary – January 14, 2022

Nicholas Glinsman | January 14th, 2022


  • Wage inflation
  • Henry Kaufman questions Fed chair’s ‘stamina’ to tame prices
  • Biden finally nominates Baskin for Vice Chair of Supervision, along with two others for the Fed’s Board

Wage inflation

The single most important number from the latest Wage Growth Tracker numbers from the Atlanta Federal Reserve, the data for which is derived from census, show that overall wage growth is up to 4.5%, its highest in 20 years. That headline figure, combined with the fact that it’s below the level of consumer price inflation — meaning real wages are actually falling, giving workers an incentive to bargain now — will maintain worries about an incipient wage-price spiral:

It’s the guts of the report that read like a new battle in the inequality war. In the following chart, wage growth for the top 25% best-paid workers is compared with raises for the poorest-paid workers. The first quartile (the worst paid) is at a 20-year high, and it exceeds growth for the fourth quartile by the greatest amount since the data starts in 1998:

This pattern recurs, again and again. Wage gains for under-24s are now above 10% and the highest on record. Over-55s are getting raises barely above 2%. It’s normal for younger workers to receive higher percentage raises, but very unusual for the gap to be this wide: 

Sorting by gender, the distributional shift in the market looks even more dramatic. Women’s pay rises exceed those of men by the most since the survey started. Women are getting their best raises in two decades; men’s raises aren’t quite as good as they were two years ago:

The low-skilled are enjoying slightly higher wage growth than the high-skilled, just as non-white workers are receiving slightly better raises than whites. Part-time workers are gaining almost as much wage growth as their full-time colleagues; in November, it had been higher for part-timers for the first time on record. In short, lower-paid workers who had a conspicuously bad deal in the years after the financial crisis of 2008 have more negotiating power after the pandemic, and they are using it.

Higher wage growth per se should be good for the economy, while more equitable remuneration holds the key to dealing with the toxic inequality that is poisoning society. The challenge is the impact on inflation. Bigger wages for the lower paid implies better things for growth, because they’re more likely to spend the extra money. However, many contemporary business models have come to rely on cheap labour. How difficult will this make life for the corporate sector? And to what extent will companies feel compelled to pass the extra costs on to consumers? These are the central questions ahead of us.

Unfortunately, workers are enjoying the best wage growth in decades but losing out to surging prices. The Post-GFC order is changing. Now, for a bit of history of a time where there was significant wage-push inflation … when the trade unions had power.

Interestingly, if you go back to 1941, when the US entered WWII, you can see what happened to hourly wages back then. I mention this as many, myself included, have defined the pandemic as the equivalent of war conditions:

And whilst on the subject of the 1970s…

Henry Kaufman questions Fed chair’s ‘stamina’ to tame prices

Henry Kaufman is one of the rare Wall Street veterans who can authoritatively draw parallels between the inflation scare of the 1970s and today’s alarming run-up in prices. Kaufman decades ago was the celebrated chief economist at Salomon Brothers nicknamed “Dr. Doom.” He correctly anticipated the era’s crippling inflation and approved when then-Fed Chairman Paul Volcker delivered the so-called Saturday Night Special, a radical — and unexpected — tightening of monetary policy on an October weekend in 1979.

And he has zero confidence Chair Jerome Powell’s Federal Reserve is ready for the battle it now faces. To Kaufman, Powell is no Volcker. Not even close. To quote from a recent interview:

I don’t think this Federal Reserve and this leadership has the stamina to act decisively. They’ll act incrementally. In order to turn the market around to a more non-inflationary attitude, you have to shock the market. You can’t raise interest rates bit-by-bit.”

Powell stated in his congressional testimony that there’s a “long road” toward getting Fed policy to a “normal” setting, suggesting more aggressive action isn’t needed to pull down inflation. Powell said the planned withdrawal of stimulus “should not have negative effects on the employment rate,” a big contrast with the Volcker-era tightening that contributed to a surge in joblessness.

A more serious pledge to tame inflation would require the Fed going much further, Kaufman said. Volcker’s 1979 decision to restrict the supply of money drove short-term rates to excruciating levels but, eventually, also crushed inflation. Prices, rising at an annual 14.8% in March 1980, were ticking up at just 2.5% a year by July 1983. Volcker emerged a hero.

“It requited a lot of fortitude in 1979 to do what the Fed did”.

Biden finally nominates Baskin for Vice Chair of Supervision, along with two others for the Fed’s Board

Biden intends to nominate Sarah Bloom Raskin as vice chair of supervision at the Federal Reserve as well as Lisa Cook and Philip Jefferson as Fed governors. This was pretty much expected.

Raskin will be the key voice on bank regulation. It is clear that Raskin is probably the most progressive option who has a chance of getting confirmed. We would expect her to tighten standards for bank M&A, make the CCAR stress test more difficult to pass, and make climate change a supervisory priority.

Raskin was confirmed to prior posts on a voice vote. It will not be so simple this time. There was opposition to her nomination at Thursday’s confirmation hearing for Lael Brainard as Fed vice chair. It is possible Raskin will not get any GOP votes. Her nomination is likely  most at risk because of her published views on climate change. Raskin said the Federal Reserve should not have let the oil and gas sector access Covid-19 crisis programmes, as it was a chance to migrate to cleaner sources of energy. She also has said climate change should be a supervisory priority. The issue is whether this is a step too far for moderate Senate Democrats? Joe Manchin is surely one who is most likely to object given the importance of coal mining in West Virginia. Yet he is not the only one. Other Senate Democrats could see this as a similar problem.

Nonetheless, the probability is greater for confirmation than it is for defeat because moderates just sank Biden’s nominee to be Comptroller of the Currency. Thus, it is somewhat hard to believe that they are not looking for a second fight over a bank regulator. Raskin also is married to Rep. Jamie Raskin, D-MD. It is unusual for the Senate to reject a nominee who is the spouse of a sitting member of Congress. We would not expect this to be a quick process. The Senate is likely to finish the confirmations of Jerome Powell as Fed chair and Lael Brainard as vice chair. That should be by early February.