A New Era Of Higher Growth And Higher Productivity May Have Just Begun

St. Louis Federal Reserve Bank President James Bullard thinks that the pandemic may have pushed the U.S. into an era of stronger growth and higher productivity. In contrast with the last decade of low growth, low productivity and low inflation.

On the good side, this would mean a sharp uptick in wages and GDP growth fuelled by technological advances and strong consumer demand. On the downside, it means that the FED might have to reduce its asset purchase program earlier than expected in order to prevent the economy from overheating and force the Central Bank to raise interest rates abruptly later.

"Cooling an overheated labor market has rarely ended without recession," JPMorgan economist Michael Feroli wrote in mid-July, concluding that while the Fed's new framework wasn't destined to fail, it did in his view increase the likelihood of a "hard landing" when the central bank does have to raise interest rates. [...] Bullard said his call for faster action on ending bond purchases is to lower that likelihood, making smaller, earlier steps rather than risking the need to "scramble" later on." by Howard Schneider for Reuters


BENCHMARK'S TAKE

  • Rising home prices and a stock market at record highs on stretched valuations have partially been enabled by an extremely dovish FED and supportive governments
  • Elements contributing to rising prices may not vanish any time soon as there are still 10m workers staying on the sidelines for now

"Of course, myriad factors are tempering labor supply at the moment—the need to care for children, fears of COVID, generous unemployment benefits" San Francisco Federal Reserve Bank President Mary Daly

  • We are therefor still cautious with technology stocks that are trading at above-average multiples and we closely watch inflationary signals. We also watch the FED's moves as a minor reduction in liquidity could wreak havoc on markets and affect richly priced assets the most

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