If the Fed Eases Aggressively, Investors Should Be ‘Very Worried About Inflation’

Piper Sandler analysts have issued a cautionary note to investors regarding the potential consequences of the Federal Reserve adopting an aggressive easing of monetary policy.

In drawing parallels with the late 1960s, the analysts warned that such actions could lead to a resurgence of inflation, particularly in the context of persistently low unemployment rates. They recalled that in 1966, unemployment was just 3.6%, and after a period of tightening, the Fed responded by cutting rates to support the labor market.

This decision initially resulted in a temporary drop in unemployment but ultimately contributed to a significant rise in inflation by 1969. The analysts express concern that a similar scenario could unfold today if the Fed pursues a comparable strategy.

Piper Sandler pointed out that while the “upside risks to inflation have diminished,” this situation appears to be primarily due to a cooling labor market. They observed that companies are reducing prices because of a slowdown in labor and consumer spending, indicating that inflationary pressures from prior fiscal and monetary stimuli are still present.

The analysts also raised concerns regarding recent remarks from Fed Chair Jerome Powell, in which he underscored the Fed’s resolve to uphold a robust labor market. They questioned whether there is sufficient flexibility in the current labor market to prevent inflation from reigniting should the Fed ease policy too much.

Piper Sandler posed a pivotal question: “Is Powell risking a repeat of the 1968-1969 inflation scenario by easing aggressively while unemployment remains near multi-decade lows?” They assert that, without a significant and sustained increase in the unemployment rate, inflation might not decline as anticipated. Should the Fed implement excessive easing, the analysts caution that investors should be “very worried about inflation.”