Contradictory high unemployment and high inflation: How will changes in US QE affect the trend of Bitcoin?

Wu said author | Rebecca

Editor of this issue | Colin Wu

Cryptocurrencies, especially Bitcoin, are currently widely seen as a product to fight inflation. However, when the US monetary policy begins to tighten, its most important significance will be eliminated.

In recent months, the United States has seen a strange surge in inflation, but the unemployment rate remains high. The Federal Reserve believes that this is a temporary phenomenon, and that inflation will grow steadily and employment will rebound quickly. What exactly happened in the United States and how to predict the subsequent direction of US monetary policy.

Unemployment remains high: People are reluctant to go to work

Unemployment is rising slowly, oddly enough probably because the government is handing out more money than people are working.

After Biden came to power, he launched two consecutive trillion-dollar economic stimulus plans. As of March 2021, the cumulative scale of US fiscal stimulus has reached 5 trillion US dollars. The monetization of fiscal deficits has made fiscal aid an important source of income for American families and individuals. According to the federal relief plan, Americans who receive unemployment benefits receive an additional $300 per week in supplementary unemployment benefits on top of regular state benefits. This means that compared to a job with an hourly wage of $15, you can earn more just by receiving subsidies. A study by the University of Chicago shows that about 42% of people receive benefits that are higher than their previous wages. If you can earn money by lying at home and doing nothing, it is reasonable for the employment rate to drop sharply.

If such a large-scale relief plan could quickly help Americans out of difficulties in the early stages of the COVID-19 outbreak, the implementation of this policy has greatly reduced the willingness of the American people to work, and has gradually changed people's cautious consumption behavior, which is likely to further trigger inflation and seriously hinder the recovery of the US economy. On the other hand, some workers are still worried about the epidemic and refuse to return to work. The problem of childcare services is also very prominent, because in many school districts, face-to-face classes are still restricted, and many parents are forced to choose to take care of their children at home.

On the contrary, in the job market, it is another story. Even though companies continue to increase hourly wages, the US non-farm payrolls report in April only increased by 266,000, far below the market's expectation of 1 million. The blow to the US manufacturing industry is even greater. Some parts in the industrial chain need to be imported, and the epidemic has caused costs to continue to rise. The manufacturing industry has suffered a double blow from rising raw material costs and a lack of recruitment. On the one hand, the labor market is extremely short, and on the other hand, there are millions of unemployed people. The demand for corporate recruitment exceeds the supply of labor capable or willing to work. Such a contradictory phenomenon will inhibit future US economic growth and slow down economic recovery.

Thomas Barkin, president of the Richmond Federal Reserve Bank, said that the issue of how to unclog the job market will be critical. If it takes too long, it may limit economic growth this year. Currently, Texas and Indiana have announced that they will stop providing supplementary unemployment benefits in June. In order to encourage people who receive unemployment benefits to go back to work, the governor of Oklahoma announced a "reward" of $1,200 for each of the first 20,000 people who find a new job.

However, when unemployment benefits are gradually cancelled in various states, companies that previously used high hourly wages to attract workers may face another problem, namely how to gradually reduce wages to normal levels. If unemployment benefits are cancelled and most unemployed people return to work, the demand for jobs will decrease. If high hourly wages are maintained at this time, it will increase corporate costs, and a sudden reduction in high hourly wages is likely to cause a rebound.

The volatility during tightening will be very sharp

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

Under the premise of high unemployment rate and low labor participation rate, the production recovery will slow down in a short period of time. But at the same time, due to large-scale economic rescue and stimulus plans, the US fiscal deficit has reached a historical high. The total demand is increasing day by day and far exceeds the market supply. From an economic perspective, it will inevitably lead to inflation. If it is not changed in time, it is likely to enter a vicious cycle.

The Federal Reserve has always held high the banner of "full employment". Atlanta Federal Reserve President Raphael Bostic said last Sunday that the Federal Reserve's main focus now is employment. It is hoped that the system and policies can play a role so that more people can get job opportunities, because then they can really start to accumulate assets.

It can be seen that the Fed allows inflation to "overshoot" for a longer period of time to promote continued improvement in employment, hoping that employment will rebound in a substantial and sustainable manner. The minutes of the Fed's April meeting also pointed out that the FOMC is seeking to achieve full and inclusive employment, and stated that under the new policy system, they will allow inflation to be slightly higher than the Fed's 2% target.

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

"We're talking about the possibility of a gradual taper," San Francisco Federal Reserve Bank President Mary Daly told CNBC on Tuesday. On Tuesday, Vice Chairman Richard Clarida said on Yahoo Finance: "It's very likely that we'll start discussing the pace of tapering asset purchases at the upcoming meeting in June." But he then reiterated that this was not the focus of the meeting and that more data was needed to support the next decision.

It can be seen that the Fed has also begun to doubt whether inflation is really "temporary", but at the same time is waiting for more data to see the inflation trend clearly. If the US inflation rate continues to be higher than 2% or higher in the next few months, it means that the pressure of price increases may be more persistent than the Fed expects, and the Fed needs to consider tightening monetary policy in advance to avoid inflation getting out of control. It must be noted that inflation is almost impossible to grow linearly. The longer the inflation "overshoot" lasts, the greater the volatility may be caused by future tightening.