President Joe Biden is joining the picket line with members of the United Auto Workers Tuesday. It’s good politics. Economically, it’s a can of worms.
The risk is that he’s encouraging workers everywhere to push for bigger pay raises. That feels good in the short run, but could also make inflation worse.
Now that the inflation rate has dropped to below 4%, the key task for the Federal Reserve is to make sure everyone expects inflation to stay slower and adjust their pay demands accordingly.
The problem is higher wages make people richer, whereas inflation makes people poorer. In an ideal world, average pay growth always outpaces inflation. It’s easier for that to happen when inflation is close to the Fed’s 2% target. When it is, wages can comfortably increase 3% to 4% a year without fanning prices.
What’s key is that the system breaks down when the inflation rate approaches 10%, as it did last year. That stings, so workers ask for big raises to make up for it. That’s a big reason for the UAW’s demands for 40% pay increases over four years.
But the big question is, what’s the right size of a pay raise, one that’s big enough to fairly compensate workers without fueling consumer-price gains? If pay increases across the economy get too big, inflation gets worse. That’s what happened in the 1970s.
It’s not what’s happening now. The UAW isn’t big enough for its demands to ripple through the whole economy. The Fed’s own research shows that wages haven’t been the driver of recent inflation.
That doesn’t mean it won’t happen in the future. It’s great that workers will get paid more, but it comes with a caveat. There’s a limit on how much they can get without damaging the economy.
—Brian Swint
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Congress Running Out of Time to Prevent Government Shutdown
While House Republicans are still working out their differences, Senate Majority Leader Chuck Schumer is preparing a bill meant to include stopgap funding to keep the government open, aid for Ukraine, and disaster relief. The proposals contain funding levels Republicans and the White House agreed on earlier this year.
- Congress returns to Capitol Hill today facing a Saturday night deadline to reach an agreement to avert a federal government shutdown. House Speaker Kevin McCarthy has said he wants members to approve a short-term continuing resolution to give them more time to pass other bills.
- If McCarthy allows the bipartisan Senate bill to go to the House floor, he could endanger his leadership role. But if he refuses to allow a vote on the Senate bill, as some Republicans want him to do, that would trigger a shutdown.
- Moody’s Investors Service said a temporary government shutdown would have limited ramifications for the broader U.S. economy, but it would be “credit negative” for the U.S. and “underscore the weakness of U.S. institutional and governance strength relative to other Aaa-rated sovereigns.”
- During the last government shutdown, which ended in January 2019, about 800,000 federal employees were furloughed or worked without pay, and Washington’s local government took over basic services, including collecting trash on the National Mall, Moody’s said. That shutdown lasted a record 34 days, Congress said.
What’s Next: The annual federal deficit is expected to rise to nearly $3 trillion a year by next decade, the Congressional Budget Office said, up from about $2 trillion this year. Even if conservative Republicans get everything they want, their spending cuts would lower that bill by $200 billion.
—Janet H. Cho
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Dimon Warns World Not Prepared for 7% Fed Rate
JPMorgan CEO Jamie Dimon said the Federal Reserve could hike interest rates to 7% but warned that the world was not prepared for such high rates.
- “Going from zero to 5% caught some people off guard, but no one would have taken 5% out of the realm of possibility. I am not sure if the world is prepared for 7%,” Dimon said in an interview with the Times of India.
- Dimon said 7% interest rates were a worst-case scenario if stagflation–a situation of rising prices coupled with no or low economic growth–sets in. “If they are going to have lower volumes and higher rates, there will be stress in the system. We urge our clients to be prepared for that kind of stress,” he said.
- He gave the interview during a visit to India after JPMorgan decided to add the country to its emerging-market government bond index. Dimon predicted the move would drive $25 billion of foreign bond purchases and encourage equity flows into India.
What’s Next: While Dimon is an outlier in his predictions of how high rates could be set to go, he is in line with a general market shift toward pricing in higher-for-longer rates following the Fed’s September decision and economic projections.
—Adam Clark
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Amazon Investing in Startup Anthropic, Joining AI Race
Amazon
is joining its Big Tech rivals in the artificial intelligence race, announcing it will invest up to $4 billion in AI start-up Anthropic, an AI safety and research company and rival to ChatGPT creator OpenAI.
- Amazon’s cloud customers will get early access to Anthropic’s technology through Amazon Bedrock, its AI platform for businesses. Anthropic will use Amazon Web Services’ in-house chips to build, train, and deploy its AI software, and make AWS its primary cloud provider.
-
Amazon will take a minority stake in the AI start-up as part of the deal. The arrangement follows
Microsoft’s
multibillion-dollar, multiyear investment in OpenAI.
Alphabet’s
Google also has invested in Anthropic. And in August Amazon participated in a $235 million funding round for AI start-up Hugging Face. - Anthropic, founded in 2021 by former OpenAI employees and siblings Dario and Daniela Amodei, introduced its AI assistant Claude that same year. Anthropic has said its Claude 2 model is adept at securely processing large amounts of technical information and generating content on subjects such as finance, law, and programming.
- Anthropic in its blog post shared some companies that are using their AI model with Amazon’s cloud computing services, including LexisNexis Legal & Professional, the hedge fund Bridgewater Associates, and travel publisher Lonely Planet.
What’s Next: Despite the hype, cloud computing companies are yet to fully realize the benefits of growth from AI services. Microsoft said in its recent earnings that of the 26% quarterly revenue growth it expected in its cloud Azure business, just two percentage points would come from AI services.
—Tae Kim, Callum Keown, and Janet H. Cho
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Costco Makes a Play in Healthcare Market With Sesame
Costco Wholesale
is joining other big retailers in a push into the $4.3 trillion healthcare market. The warehouse club’s members are eligible for discounted online primary care and other medical services through Sesame, an online physician marketplace that was backed by Google’s venture capital unit in 2022.
- Sesame doesn’t accept health insurance, but offers same-day virtual primary care or prescription-refill appointments for $29, health checkups including lab work and a follow-up for $72, or virtual mental health therapy for $79. Costco members also get discounts for in-person appointments and other services.
-
Rival retailers have also expanded into primary care.
Walmart
has opened in-store clinics, Amazon bought One Medical for $3.5 billion, and
Kroger
and
Best Buy
have opened healthcare divisions. Costco has 125 million cardholders. - Costco already offers pharmacy, vision, and hearing aid services in its stores, and has a minority stake in Navitus Health Solutions, a pharmacy benefits manager, Bloomberg reported. Sesame’s marketplace doctors work from their own offices and won’t be opening locations in Costco stores.
- Sesame’s network includes primary care doctors and nurse practitioners, more than 40 health specialties, labs, and imaging centers. It focuses on people who aren’t insured or who have high-deductible plans and have to pay out of their own pockets.
What’s Next: Costco Wholesale saw strong back-to-school sales and foot traffic, compared with its warehouse rivals, according to Placer.ai. The company reports earnings today and analysts surveyed by FactSet expect it to report adjusted earnings of $4.79 a share on revenue of $77.7 billion.
—Janet H. Cho
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Oil Continues Its March Upward Toward $100 a Barrel
More Wall Street forecasters see oil reaching $100 a barrel amid production cuts by Saudi Arabia and Russia. Economists worry more expensive fuel could push American consumers to cut their spending on services such as travel and restaurant dining and stall growth, despite their resilience so far.
- Brent crude, the international benchmark, is up 24% since late June, at around $92 a barrel. WTI, the U.S. benchmark, is up 30% since June, to just under $90 a barrel. With $100 in sight, record oil output in the U.S. could keep it from rising much higher than that. However, Brent crude futures fell early Tuesday.
- Fed Chair Jerome Powell called the recent jump in energy prices significant and said it could affect consumer spending and sentiment. Still the run-up in WTI’s price is smaller than the rise in 2020 to 2022 that sparked current inflation, The Wall Street Journal reported.
- Edward Moya, a senior market analyst at Oanda, said hedge fund bets on oil are getting overcrowded. The latest data show bullish bets are at their highest levels since February 2022, he added. “As the risks of $100 oil grow, energy traders are awaiting a fresh catalyst.”
What’s Next: Oil traders are paying attention to China, Bloomberg reported. The world’s top oil importer is getting ready for Golden Week, a holiday that starts this weekend and is expected to stoke demand for air travel. More than 21 million people are expected to fly.
—Liz Moyer
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—Newsletter edited by Liz Moyer, Rupert Steiner, Callum Keown
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