![]() The Fed has acknowledged the risk of a price-wage inflationary spiral and started to tighten monetary policy in March 2022 by reducing its balance sheet (QT) and also by increasing interest rates, up to date by 5%, which is one of the sharpest monetary policy tightening cycles ever. This brings us to the most recent monetary policy tightening cycle. The lagging effect of recent monetary policy tightening In fact, we could be facing a price-wage inflationary spiral. The combined effect is an increase in core inflation, particularly in the service sector, which is labor-intensive. But also, the labor shortage is causing higher growth in wages due to limited labor supply. First, the unemployment rate is low, which supports demand. These two unfolding macro trends are producing a major labor shortage in the US. Specifically, baby boomers are retiring and exiting the labor force, which is also reducing labor force growth. At the same time, due to onshoring, some jobs are returning to the US, which is increasing demand for labor.Īnother trend to watch is related to demographics. As part of this trend, the US has implemented a stricter immigration policy, which is reducing growth in the labor force. The market today is also affected by several unfolding macro trends.įirst, we are currently in an unfolding trend of de-globalization. These excess savings are expected to run out by the end of 2023. In addition, consumers still have some excess savings from the COVID-related fiscal stimulus, which is also supporting consumption. This is still keeping consumption strong and the economy growing. Specifically, home prices are still very high, and even the stock market is near all-time highs.Īs you may remember, the Fed implemented QE in 2020 and pushed real interest rates down to -1%, which inflated the housing bubble (price/rent ratio exceeded 141) as well as the stock market bubble (S&P500 PE ratio exceeded 35).Īs a result, consumers today have record wealth in home equity as well as in their investment accounts. The market today is still affected by the COVID-related monetary and fiscal policies, primarily via the wealth effect. ![]() Effect of COVID-related monetary and fiscal policy Note: This is a transcript of my expected July 3rd speech on H2 outlook.
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