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article
박재훈투영인 프로필 사진박재훈투영인
Is the Labor Market Overheating?(APRIL 1, 2022)
created At: 2/12/2025
Sell
Sell
This analysis includes a sell recommendation. Please carefully review all mentioned risk before proceeding.
133690
Mirae Asset TIGER NASDAQ100 ETF
226490
Samsung KODEX KOSPI ETF
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0
0
Fact
Fed facing strong hiring and near pre-pandemic unemployment Interest rates currently below 0.5%, neutral rate between 2-3% Fed plans multiple rate hikes to reach around 2% this year Fed hasn't raised rates by 0.5% since 2000 Inflation pressures broadening beyond goods to services Fed preparing to unwind $9 trillion asset portfolio Labor market strength could support 0.5% rate hike in May Fed has limited experience with simultaneous rate hikes and balance sheet reduction
Opinion
The Fed's position shows deeply troubling signs of being behind the curve. The combination of broadening inflation, strong wage growth, and historically accommodative policy creates dangerous conditions for an inflation spiral. Most concerning is how the Fed must simultaneously tackle rate normalization and balance sheet reduction with limited historical precedent, while inflation is already well above target and labor markets are tight. The need to be "humble and nimble" suggests significant uncertainty about policy impacts.
Core Sell Point
The Fed's unprecedented challenge of simultaneously unwinding multiple forms of stimulus while fighting broadening inflation pressures suggests increased risk of policy error that could lead to either uncontrolled inflation or severe economic disruption.

Annmarie Fertoli: US employers are hiring at a brisk pace and the unemployment rate is nearing pre pandemic levels. But there are some worries, namely that record high job openings and higher wages could further fuel inflation. Federal Reserve Chairman Jerome Powell expressed concerns about that earlier this month when the Central Bank moved to raise interest rates for the first time since 2018. What does the latest jobs report mean for the Feds path going forward? I'm Annmarie Fertoli from the Wall Street Journal, and I'm joined now by Wall Street Journal, Chief Economics Correspondent, Nick Timiraos. Hi, Nick. Thanks for being here.

Nick Timiraos: Thanks for having me.

Annmarie Fertoli: Nick, overall we saw strong hiring last month, but this is actually something that could pose a challenge for the Fed, which is closely eyeing whether or not this economy right now is overheating. Can you explain those dynamics for us?

Nick Timiraos: Well, the Fed is concerned about inflation running too high, and initially the Fed thought that was primarily happening because of a shortage of goods leading to extreme price pressures for a high handful of things like used cars and new cars. But the concern now is that inflation is broadening to include a broader range of goods and also services. And if you think about the services that we purchase, whether it's haircuts, or restaurant meals, those are things where labor is the main expense. And when you begin to see pressures driving wages higher, that adds to the Fed's concern that inflation is going to be harder to get out of the economy than if it were just rising because of some idiosyncratic price increases for things like used cars.

Annmarie Fertoli: Now, how does the Fed usually handle these dueling mandates of achieving maximum employment while keeping inflation near the target 2%? We know that inflation hasn't been near that Fed target for quite some time now.

Nick Timiraos: Well, sometimes as you note, the mandates can be in conflict. Right now, they're not. Right now, you have very strong employment and very high inflation. And the Fed will look at that and say, "Obviously we need to raise interest rates." Right now, interest rates are just below a half percentage point and the Fed thinks that a neutral rate, which would be where you're no longer providing stimulus, but you're not necessarily stepping on the brakes. They think that's somewhere between 2 and 3%. We're nowhere near their estimates of what a neutral rate would be. Right now, the Fed is on a clear path to get interest rates up this year to something around 2% give or take. The question's going to be, what do you do after that if the economy's still standing strong and inflation's still coming in high? Inflation results when there is an imbalance of supply and demand. The Fed can't do anything about supply of oil, shortages of cars. They can't fix the supply side of the economy. The only way for them to really bring supply and demand into balance in the short run is to reduce demand. And that's what would begin to happen once they get interest rates to neutral. If they decide to keep raising interest rates, they would be trying to deliberately slow down the economy, destroying demand, weakening the job market in order to get inflation to come down.

Annmarie Fertoli: We know that the Fed is planning to raise interest rates several times this year. What does the latest data from the jobs report mean for how Fed officials might proceed at their next meeting in May?

Nick Timiraos: The big question at the May meeting is not whether the Fed will raise interest rates, it's by how much. Traditionally, when the Fed raises interest rates, they move in just a quarter percentage point increment, but there are times when the data might call for a larger increase, a half percentage point increase. Now, the Fed has not raised interest rates by a half percentage point since 2000, but we haven't been in an environment where inflation's this high and where the unemployment rate is this low. When the unemployment rate fell to this half century low level in 2018 and 2019, inflation was at 2%. The big question now is really will the Fed do a supersized half percentage point interest rate increase in May? And the report from the Labor Department here gives them a green light to do a half point increase if they want to.

Annmarie Fertoli: And what does the latest jobs report mean for the Fed's plans to unwind its $9 trillion asset portfolio?

Nick Timiraos: The Fed has two tools that they've used to provide stimulus, which is cutting interest rates during the crisis. They cut rates to zero and then after that they purchase longer term bonds and mortgage backed securities, again, to push rates even lower. Now, as they're unwinding their stimulus, they're raising interest rates, but they're also preparing at their May meeting to announce a plan to shrink the asset holdings to allow that stimulus to reverse. And it's very likely that the Fed will begin to do that. And it's a double barreled form of policy tightening. It's not something that the Fed has a lot of experience with because they've only done this one other time after they expanded their asset portfolio. After the 2008 recession, they unwound it a little bit in 2017, 18, and 19. Now they're talking about more aggressively running down the securities holdings in that portfolio. It's very much going to be trial and error, wait and see, Fed Chair J Powell is talking about being humble and nimble. And that suggests that the Fed is doing something they don't have a lot of experience doing, which is to bring inflation down when it's way above its target, possibly raising rates a lot more than they have in the last two decades all while shrinking their asset portfolio.

Annmarie Fertoli: All right. That's Wall Street Journal Chief Economics Correspondent, Nick Timiraos. Nick, thanks so much for your time today.

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