Rosalind Evans
The second quarter earnings season for US firms commences this week, delivering the profit or loss reports from April to June 2023 while also unveiling fresh inflation data.
Many economists are connecting these two elements, spotlighting the trend of the price-price spiral where companies amplify their prices above the cost increase for the sake of profit enhancement.
Here’s the current state of affairs: After a prolonged period of escalating prices due to COVID-19-induced shutdowns, supply chain disruptions and geopolitical instability, we’re witnessing a reduction in inflation. Prices of commodities such as oil, food and production materials are finally receding.
However, it doesn’t indicate that consumer goods prices are dropping. On the contrary, they continue to escalate at a rapid pace.
Jerome Powell, the Federal Reserve Chair, has repeatedly suggested that slowing wage growth is essential for price stabilization. According to him, the Fed’s inflation target of 2% cannot be achieved without reducing employment rates.
But several Federal Reserve economists believe that the real culprit is corporate profit. A study by the Kansas City Fed reveals that in 2021, almost 60% of US inflation resulted from an increase in corporate profits, which is significantly higher than the historical contribution of about a third to price growth.
This trend is not restricted to the US alone. The International Monetary Fund has projected that corporate profits now contribute to nearly half of all euro area inflation.
Christine Lagarde, the president of the European Central Bank, highlighted this issue in a recent speech, stating that inflation in the euro area has changed its nature, with companies raising prices for different reasons as pandemic shocks recede.
Albert Edwards, Societe Generale’s global strategy economist, has previously mentioned that companies are taking advantage of customers by overcharging for extra profits, which he sees as the leading cause of high inflation.
Instead of acknowledging this as the critical reason behind inflation, central banks have focused mainly on rising nominal wages — the so-called ‘wage-price spiral.’
Our concern should not lie with the wage-price spiral but rather the price-price coil. Lael Brainard, former Fed vice chair and current director of the National Economic Council, warned in a January speech that a price-price lock could potentially harm the economy by discouraging consumer spending.
Coming up: The Consumer Price Index will be released on Wednesday and the Producer Price Index on Thursday, with the second-quarter earnings reports beginning with JPMorgan Chase, Wells Fargo, Citi, and BlackRock on Friday morning.
Revamping Regulations for Large Banks
Michael Barr, the Federal Reserve’s vice chair for supervision, expressed his intent on Monday to radically change how we regulate large banks in the United States to ensure their resilience during challenging periods.
A crucial component of this change involves increasing the capital requirements for banks, ensuring they have sufficient funds to weather tumultuous times.
According to Barr’s proposal, banks holding at least $100 billion in assets would be subjected to similar regulations currently applied to banks with $700 billion in assets. This would mandate banks to have an additional $2 of capital for every $100 of risk-weighted assets, increasing two percentage points in capital.
During a speech, Barr praised the importance of capital in absorbing potential losses, regardless of their source.
Additional details on the proposed banking regulations will be officially unveiled later this summer, my colleague Elisabeth Buchwald reports. It’s anticipated that the implementation could take years, following the standard notice-and-comment rulemaking process.
Wells Fargo Elevates Dawson Her Many Horses to Managing Director Role
Wells Fargo confirmed on Monday that Dawson Her Many Horses, the head of Native American banking for the company, has been promoted to managing director.
Her Many Horses, a member of the Rosebud Sioux Tribe of South Dakota, has become one of the first registered tribal members to ascend to a managing director role at a leading US bank, according to a Wells Fargo statement.
“Dawson’s career growth from catering to the financial needs of tribal governments and tribally owned enterprises to becoming the national leader in capital flow to tribal communities is commendable,” says Ruth Jacks, head of diverse segments for Wells Fargo Commercial Banking.
Joining Wells Fargo in 2018 as senior vice president in middle market banking, Her Many Horses concentrated on reviving the bank’s Native American banking effort. In 2021, he was elevated to the head of Native American Banking for commercial banking.
Wells Fargo’s Native American Banking, as per the company’s statement, is the primary provider of capital and financial services to Native American and Alaska Native markets. Wells Fargo maintains banking relationships with one-third of the federally recognized tribes in the United States, with about $3.4 billion in credit commitments and $4.1 billion in deposits.
As we move through the second quarter earning season, the interplay between corporate profits and inflation remains in focus. It remains to be seen if inflation will continue its decline and if corporations will adjust their pricing strategies accordingly. Equally, new proposals for regulating large banks and advancements in diversity and representation in banking roles offer promising developments for the industry’s future. However, the long-term impacts of these changes remain to be seen, requiring careful monitoring and flexible adaptation from all stakeholders.
