US labour market conditions continue to heal as testified by a declining unemployment rate and a rising labour force, thereby helping to allay fears of supply-side impairment due to the COVID-19 pandemic. The pace of labour market improvement will slow, particularly if there are disputes about the outcome of the Presidential Election.
In the aftermath of last year’s Fed Listens meetings, Chair Powell outlined that labour conditions in socially-disadvantaged communities will impact future policy conduct. Aggregate labour market slack is greater than perceived due higher unemployment rates in socially-disadvantaged communities and, consequently, the Fed should allow the civilian unemployment rate to dip even further below its natural rate.
There has been no progress in advancing fiscal policy support at the federal level due to the Congressional summer recess, but there are risks of a government shutdown at the end of the month. Fiscal policy at the state level, notably in California and New York, could be tightened to bridge budget gaps that could be detrimental to state economies.
US retail investors have increasingly participated in the post-March equity rally, although historically this has been a warning signal of an impending market peak. Options have become a favoured conduit to participate in rising equity prices, but this practice has also contributed to higher volatility in the stock prices of market leaders.
US equity bulls are convinced the next decade will herald a new wave of technological innovations, analogous in their impact to those that transformed the 1920s. Historically, technological innovations have benefited the household sector via lower selling prices as opposed to higher corporate profit margins, but a looming decade of innovation implies downward pressure on inflation and, consequently, a return to 20th Century interest rate levels will be highly unlikely.