Reversing Stimulus Early Could Be Harmful

Powell said Friday that the U.S. economic recovery appears to be making progress, but warned that the Fed needs to be careful not to tighten its policy before enough Americans are able to jump back in the labour market.

"Today, with substantial slack remaining in the labor market and the pandemic continuing, such a mistake could be particularly harmful, [...] We know that extended periods of unemployment can mean lasting harm to workers and to the productive capacity of the economy." Jerome Powell, Fed Chair

Powell stressed that the labor market has 6 million people out of work compared to pre-pandemic levels. However, he said that the vaccinations, reopening of schools, and the end of unemployment insurance will eventually restore some of the unemployed.

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The Fed chair also said it could be appropriate to reduce the pace of asset purchases this year as the trajectory of the labor market suggests employment will continue to rise at a robust rate.

However, Powell firmly believes that the inflation spikes are only temporary side-effects of restarting the economy from the short but hard pandemic-induced recession.

BENCHMARK'S TAKE

  • Fears of the Delta variant are slowing down the recovery and dimming inflation expectations, reinforcing the Fed's take of transitory inflation
  • Despite relatively elevated inflation readings, we now believe that the increase in inflation will be short lived and make space for a period of low inflation once global shipping routes and the labour market have been restored
  • Despite this, the valuation of many tech and high growth stocks in the U.S. remains elevated. We are thus still on the sidelines for most U.S.-based equities

Disclaimer

Please note that this article does not constitute investment advice in any form. This article is not a research report and is not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products.

Credits

Photo by Frederick Warren on Unsplash.