Paradoxically High Unemployment and Inflation How US QE Changes Could Affect Bitcoin’s Direction

Cryptocurrencies, and Bitcoin in particular, are now widely seen as a product of the fight against inflation, and then their most important significance will be dissipated when the U.S. currency begins to tighten.

Paradoxically High Unemployment and Inflation How US QE Changes Could Affect Bitcoin's Direction

High unemployment is only a temporary phenomenon caused by high subsidies, but high inflation is an ongoing phenomenon. U.S. monetary policy will definitely taper, it just depends on whether it is mid-year, late in the year or next year. The probability of tapering starting in the fall is increasing, but it remains to be seen.
Cryptocurrencies, especially Bitcoin, are now widely seen as a product of the fight against inflation, and then their most important significance will be dissipated when the U.S. currency begins to tighten.

In recent months, the U.S. has seen a bizarrely steep increase in inflation, but unemployment remains high. The Fed sees this as a short-lived phenomenon, followed by a steady increase in inflation and a rapid rebound in employment. What is happening in the US and how to predict the subsequent direction of US monetary policy.

Unemployment remains high: people don’t want to go to work

Unemployment is increasing slowly, oddly enough, probably because the government is handing out more money than it is going to work.

After Biden came to power, he launched two consecutive trillion-dollar stimulus packages, and by March 2021, the cumulative size of the U.S. fiscal stimulus had reached $5 trillion. The monetization of the fiscal deficit has made financial assistance an important source of income for American families and individuals. Under the federal relief program, Americans receiving unemployment benefits receive an additional $300 per week in supplemental unemployment benefits on top of their regular state benefits. This means that a person can earn more on benefits alone than if he or she were working for $15 an hour. A study by the University of Chicago showed that about 42 percent of people receive benefits that are higher than what they were earning at their previous job. If you can have a financial income by lying at home and doing nothing, it makes sense that the employment rate would drop significantly.

If at the beginning of the new epidemic, such a large-scale relief program could quickly help Americans out of difficulties, but today, the implementation of this policy has greatly reduced the willingness of the American people to work, and also gradually changed people’s prudent consumption behavior, which is likely to further trigger inflation and seriously hinder the recovery of the U.S. economy. On the other hand, some workers still fear the epidemic and refuse to return to work. Problems with childcare services are also prominent, as face-to-face classes remain restricted in many school districts and many parents are forced to choose to care for their children at home.

In contrast, in the job market, it is a different story. Even as companies continue to raise hourly wages, U.S. nonfarm payrolls reported an increase of only 266,000 in April, well below market expectations of 1 million growth. The manufacturing industry has been hit even harder by the rising cost of raw materials and the inability to recruit people, as parts of the industry chain need to be imported and the epidemic continues to cause costs to rise. On the one hand, the labor market is extremely short, on the other hand, there are millions of unemployed people, and the demand for companies to recruit exceeds the supply of labor capable or willing to work.

Richmond Federal Reserve Bank President Barkin (Thomas Barkin) said that the issue of how to unblock the job market will be very critical, if it takes too long, may limit economic growth this year. Currently, Texas and Indiana have announced that they will stop providing supplemental unemployment benefits in June. To encourage people on unemployment benefits to go back to work, Oklahoma’s governor announced a $1,200 “bonus” for each of the first 20,000 people to find a new job.

But when state unemployment benefits are phased out, companies that previously used high hourly wages to attract workers may face another problem: how to gradually reduce wages to normal levels. If unemployment benefits are eliminated and most of the unemployed return to work, then the job market demand will decrease. If you continue to maintain high hourly wages at this time, it will increase the cost of business, and a sudden reduction in high hourly wages is likely to cause a backlash.

The volatility of tightening will be very sharp

The latest data from the U.S. Department of Labor show that the U.S. Consumer Price Index (CPI) rose 4.2% year-over-year in April, the largest year-over-year increase in more than 12 years; the core CPI rose 3% year-over-year that month, the largest year-over-year increase in more than 25 years.

With high unemployment and low labor force participation, production recovery has slowed in the short term. But at the same time, the U.S. fiscal deficit has reached a record high due to the massive economic bailout and stimulus programs. Aggregate demand is increasingly elevated and far exceeds market supply, which inevitably leads to inflation from an economic analysis. If not changed in time, it is likely to enter a vicious circle.

The Federal Reserve has always held high the “full employment” flag, Atlanta Fed Governor Bostic (Raphael Bostic) said on Sunday that the Fed’s main focus is now employment. Hopefully, the system and policies will work to allow more people to get jobs, because then they can really start to accumulate assets.

As you can see, the Fed allows inflation to “overshoot” for a longer period of time to promote continued improvement in employment, hoping that employment to pick up in a substantial and sustainable way. The minutes of the Fed’s April meeting also noted that the FOMC is seeking to achieve full and inclusive employment, and said that under the new policy regime, they would allow inflation to be slightly above the Fed’s 2% target.

But there have been signs of a shift in the attitude of some Fed officials, who said at the April meeting that “if the economy shows “rapid progress,” it may be “appropriate to consider reducing asset purchases.

Mary Daly, president of the Federal Reserve Bank of San Francisco, told CNBC on Tuesday, “We are talking about the possibility of a gradual tapering.” On Tuesday, Vice Chairman Richard Clarida said on Yahoo Finance, “It’s likely that discussions on the pace of tapering of asset purchases will begin at the upcoming meeting in June.” But then he reiterated that this is not the focus of the meeting and that more data is needed to support the next decision.

As you can see, the Fed is also beginning to doubt whether inflation is really “temporary”, but at the same time waiting for more data to see the trend of inflation. If the U.S. inflation rate continues to be higher than 2% or more in the coming months, it means that upward pressure on prices may be more persistent than the Fed expects, and the Fed will need to consider tightening monetary policy in advance to avoid runaway inflation. It is important to note that inflation is hardly likely to grow linearly, and the longer inflation “overshoots”, the more volatile future tightening is likely to be.

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