The reduction in US monetary policy may be this year.
Written by: Rebecca
Cryptocurrency, especially Bitcoin, is currently generally regarded as a product of fighting inflation, so when the U.S. currency begins to contract, its most important significance will also be dispelled.
In recent months, the United States has seen a bizarre increase in inflation, but the unemployment rate remains high. The Fed believes that this is a short-lived phenomenon, and subsequent inflation will increase steadily and the employment rate will rebound rapidly. What happened in the United States and how to predict the future direction of the US monetary policy.
Unemployment rate remains high: people don’t want to go to work
The unemployment rate is increasing slowly, and strangely it may be because the government pays more than work.
After Biden came to power, he launched two consecutive economic stimulus plans of up to one trillion U.S. dollars. By March 2021, the cumulative scale of US fiscal stimulus has reached 5 trillion U.S. dollars. The monetization of the fiscal deficit has made fiscal assistance an important source of income for American families and individuals. According to the Federal Relief Program, Americans receiving unemployment benefits receive an additional $300 in supplementary unemployment benefits per week on the basis of regular state benefits. This means that you can earn a higher income simply by receiving a subsidy than a job with an hourly salary of $15. A study by the University of Chicago showed that about 42% of people received more benefits than they paid for their previous work. If you lie at home and do nothing, you can earn income, and it is only reasonable for the employment rate to drop drastically.
If we say that such a large-scale relief program can quickly help Americans get out of difficulties in the early days of the new crown epidemic, but to this day, the implementation of this policy has greatly reduced the willingness of the American people to find employment, and it has gradually changed people’s caution. Sexual consumption is likely to further trigger inflation and severely hinder the recovery of the US economy. On the other hand, some workers are still worried about the epidemic and refuse to return to work. The problem of childcare services is also very prominent, because in many school districts, face-to-face classrooms are still restricted, and many parents are forced to choose to take care of their children at home.
On the contrary, in the job market, it is another scene. Even if companies continue to increase their hourly wages, the April US non-agricultural employment report only increased by 266,000, which was far below the market’s expected increase of 1 million. Among them, the US manufacturing industry has been hit harder. Some parts in the industrial chain need to be imported, and the epidemic has led to a continuous increase in costs. The manufacturing industry suffers from the double blow of rising raw material costs and inability to attract people. On the one hand, the labor market is extremely short, and on the other hand, there are millions of unemployed people. The demand for corporate recruitment exceeds the supply of labor capable or willing to work. This contradiction will inhibit the future economic growth of the United States and slow down the economic recovery.
Richmond Federal Reserve Bank President Thomas Barkin said that how to dredge the job market will be very critical, and if it takes too long, it may limit economic growth this year. At present, Texas and Indiana have successively announced that they will stop providing supplementary unemployment benefits in June. In order to encourage people receiving unemployment benefits to return to work, the governor of Oklahoma announced that the first 20,000 people who have found a new job will be offered a “reward” of $1,200 per person.
But when the unemployment benefits of the states are gradually cancelled, companies that previously used high hourly wages to attract workers may face another problem, that is, how to gradually reduce wages to normal levels. If unemployment subsidies are cancelled and most unemployed people return to work, the demand in the job market will decrease. If you continue to maintain a high hourly wage at this time, it will increase the cost of the enterprise, and a sudden reduction in the high hourly wage is likely to cause a rebound.
The volatility during tightening will be very severe
According to the latest data released by the US Department of Labor, the US Consumer Price Index (CPI) rose 4.2% year-on-year in April, the largest year-on-year increase in more than 12 years; the core CPI rose 3% year-on-year for the month, the largest year-on-year increase in more than 25 years.
Under the premise of high unemployment and low labor participation rate, the recovery of production slowed down in a short period of time. But at the same time, the large-scale economic rescue and stimulus plan has caused the US fiscal deficit to reach a record high. The total demand is increasing day by day and far exceeds the market supply. From an economic perspective, it will inevitably lead to inflation. If it is not changed in time, it is likely to enter a vicious circle.
The Federal Reserve has always held high the banner of “full employment.” The President of the Atlanta Fed, Raphael Bostic, said on Sunday that the Fed’s main focus now is employment. It is hoped that the system and policies can play a role, so that more people can get job opportunities, because in this way they can really start to accumulate assets.
It can be seen that the Federal Reserve allows inflation to “overshoot” for a longer period of time to promote continuous improvement in employment, hoping that employment will rebound in a substantial and sustainable manner. The minutes of the Fed’s April meeting also pointed out that the FOMC is seeking to achieve full and inclusive employment, and stated that under the new policy system, they will allow the inflation rate to be slightly higher than the Fed’s 2% target.
However, the attitude of some Fed officials has shown signs of change. Fed officials stated at the April meeting that “if the economy shows “rapid progress”, it may be “appropriate” to consider reducing asset purchases.
Mary Daly, President of the Federal Reserve Bank of San Francisco, told CNBC on Tuesday: “We are talking about the possibility of gradual reduction.” On Tuesday, Vice Chairman Richard Clarida spoke on Yahoo Finance. Shang said: “It is very likely that discussions will begin at the upcoming meeting in June to reduce the pace of asset purchases.” But then he reiterated that this is not the focus of the meeting and that more data is needed to support the next decision.
It can be seen that the Fed has also begun to doubt whether inflation is really “temporary,” but at the same time it is waiting for more data to see the trend of inflation. If the U.S. inflation rate continues to be higher than 2% or higher in the next few months, it means that price inflation may be more persistent than the Fed expects. The Fed needs to consider tightening monetary policy in advance to avoid uncontrollable inflation. It must be noted that inflation is almost impossible to grow linearly. The longer the inflation “overshoots”, the greater the volatility brought about by future deflation.
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