The S&P 500 closed at yet another new high yesterday. The market was flat until about 2:00 pm. What was the catalyst that drove prices higher after 2:00? The nation’s esteemed and astute Federal Open Market Committee announced the results of their latest policy meeting. Despite building evidence that inflation is accelerating and that the labor market is tightening, Yellen & Co., said inflation is still too low. They also told us that even though the unemployment rate has come down faster than the Fed expected, the labor market is actually worse than the headline unemployment rate indicates because there is a large group of shadow unemployed.
This is a slippery slope for the Fed. Many of these shadow unemployed are likely out of the labor market for good. Yet, Yellen & Co., continue to pump billions of dollars of monetary stimulus that works with long and variable lags into the financial system because they have a hunch that the unemployment statistics don’t tell the whole truth.
What is the downside if the Fed is mistaken about the labor market and conditions are actually tighter than they assume? I hope you liked the 1970s because pumping excess liquidity into an economy operating near capacity most often results in inflation. And once inflation takes root, it can be a bear to get back in the bottle.