Wall Street bosses are in a bind about whether to cut investment bankers or keep them on staff in hopes of a recovery from a brutal first half.

With risks of a recession looming and the Federal Reserve raising rates aggressively to stem inflation, prospects for arranging and financing deals have dried up.

Some banks are continuing to add staff, but the momentum has slowed from last year’s frenetic pace and some expect cuts to be inevitable.

While executives at US banking giants said market activity could bounce back after the first-half slump, it will probably be modest compared with a record year for transactions in 2021. Government stimulus and low interest rates set off a gusher of deals as companies rejigged their businesses last year, propping up bank divisions that advise corporations.

“There are a lot of people who think that we will get through this brutal uncertainty and that’s why, for example, there’s still much more hiring going on than we might have expected,” said Julian Bell, managing director and head of Americas at Sheffield Haworth, a recruitment firm for top executives.

Investment banks hired 152 managing directors in the Americas in the first half, Sheffield Haworth said in a report. That is a relatively modest decline from the 192 senior bankers who got new jobs in the same period last year, which was the busiest on record for the industry at large.

For now, banks have held off on widespread job cuts, which Bell said is “because people realize that we’re in a pause as opposed to a disaster — at least so far.”

But weakness has emerged in segments of banking.

JPMorgan Chase & Co, Wells Fargo & Co and other mortgage lenders have cut staff in recent months as the industry downsizes after having expanded to handle a surge in pandemic demand.

Global equity capital market transactions have dropped nearly 69% in the first half from a year earlier, while mergers and acquisitions declined by nearly 23%, according to Dealogic.

Tough times this year and a “mediocre” outlook for 2023 will prompt investment banks to cut 5% to 10% of their staff and reduce compensation for those who remain, said Alan Johnson, managing director at compensation consultancy firm Johnson Associates.

“They are not going to pay as well,” said Johnson. “People are putting lists together - usually this will begin after Labor Day. With the advantage of hindsight, firms have too many people.”

Goldman Sachs Group Inc executives said the firm has slowed down hiring, and is restarting employee performance reviews, which had been suspended during the pandemic. That annual exercise typically weeds out underperformers.

“There’s going to be more volatility and there’s going to be more uncertainty,” CEO David Solomon told analysts after the company reported second-quarter results on July 18. Solomon said in light of the current environment “we will manage all our resources cautiously and dynamically.”

The company’s headcount swelled to 47,000 at the end of June, up 15% from a year earlier.

JPMorgan, which boosted its headcount by 8% for corporate and investment banking in the second quarter from a year earlier, was also cautious about the outlook for transactions.

JPMorgan and Goldman declined to elaborate further when contacted by Reuters.

Executives in financial services and other industries including retail and technology are markedly less positive about dealmaking prospects, according to a market survey by KPMG, an accounting firm. “The longer a down-cycle persists, more institutions may be forced to consider capacity reductions,” Dylan Roberts, KPMG partner looking at financial services strategy, told Reuters.—Reuters