Piper Sandler analysts have issued a warning to investors if the Federal Reserve (Fed) decides to loosen monetary policy aggressively.
They drew on historical parallels with the late 1960s, and warned that such actions could reignite inflation, especially if the unemployment rate remained low.
Looking back, Piper Sandler noted, "In 1966, the unemployment rate was a very low 3.6%," and after a period of tightening, the Fed aggressively cut rates to maintain a strong job market.
Piper Sandler explained that this decision led to a temporary drop in unemployment but eventually paved the way for a surge in inflation in 1969.
Analysts fear history may repeat itself if the Fed acts as it did today.
Piper Sandler emphasized that although "the risk of rising inflation has diminished," this is largely due to the weakness of the labor market. They note that companies are cutting prices as "labour and spending power" weakens, suggesting that the inflationary effects of previous fiscal and monetary stimulus measures are still lingering.
Analysts were concerned by Fed Chairman Jerome Powell's latest comments, in which he emphasized the Fed's commitment to supporting a strong job market. They question whether there is "enough room" in the current labor market to prevent inflation from rebounding too quickly if the Fed loosens monetary policy too much.
They argue that without a "sustained shift in the unemployment rate," inflation may not fall as expected. If the Fed eases too aggressively, analysts warn, investors will have to "show concern about inflation."
