The dynamic of employment changed dramatically because of the pandemic and the stimulus provided to consumers as a result.ww
People were let go from their jobs, especially jobs that didn’t have a way to “work from home”. Factory jobs and jobs in the service industry, for example.
To combat a declining economy and unemployed workers struggling to make ends meet, the government decided to inject liquidity into the market. They did this through increased unemployment benefits and stimulus payments to those that qualified.
This aid sent to consumers helped out a lot of people, but it didn’t entirely go according to plan. One of the intentions of the stimulus payment was to incentivize people to spend – that’s why a large number of the second payment came via a Visa gift card.
When people spend, the economy does better.
Unfortunately, people saved their stimulus payments, but thankfully the market and the economy didn’t suffer as a result.
That leads to the predicament we could soon find ourselves in. The economy is doing better. The majority of the United States population has been vaccinated (just a reminder that a majority is anything over 50%). Daily life is starting to return to normal; it’s happening slowly, but we are trending in the right direction.
As people grow more confident in their ability to go out into the world, and they get more confident in the economy and the market, they’re likely to spend some of that savings.
Low rates, decreasing unemployment, and more spending are three legs to likely inflation pressures.
Now, I know I wrote about inflation pretty recently (here), but I feel it’s necessary to beat that drum again.
The FED already said that they will be more liberal when it comes to monetary policy. That means they will be more likely to let inflation run hot (relative to their 2% inflation target) for an extended period of time.
What they are doing with that stance, is they don’t want to kill a recovery when it’s just getting started. That’s what happened in 2018 when they raised rates throughout the year, but that increase in interest killed the economic growth and popped a bubble.
Okay, so the recipe for inflation is set, but what does that mean for me?
Honestly, that’s hard to say. We already said that inflation is likely, and in some cases, it’s already here. The question is, how much inflation is too much? This question will be answered by the FED.
And the answer will show itself when they relax their easy monetary policy. Interest rates could go up and the FED’s balance sheet could reduce in size.
At that point, I believe it’s only a matter of time (my hunch is not a lot of time) until the bubble we’ve created pops.
If you’re invested for the long haul, hunker down and hold steadfast. Avoid panic selling. If your time horizon is shorter, soon may be a good time to take some profits and de-risk your portfolio.
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