Piper Sandler analysts have issued a warning for investors if the Federal Reserve decides to ease monetary policy aggressively.
Drawing a historical parallel to the late 1960s, they cautioned that such a move could reignite inflation, especially if unemployment remains low.
Reflecting on past events, Piper Sandler noted, "Back in 1966, unemployment was a very low 3.6%," and after a period of tightening, the Fed aggressively cut rates to maintain a strong labor market.
Piper Sandler explains that this decision led to a temporary decrease in unemployment but ultimately set the stage for a surge in inflation by 1969.
The analysts fear that history might repeat itself if the Fed acts similarly today.
Piper Sandler emphasized that while "upside risks to inflation have diminished," this is largely due to a weakening labor market. They noted that companies are cutting prices because "labor and spending power" are slowing, suggesting that the inflationary effects from earlier fiscal and monetary stimulus measures are still lingering.
The analysts are particularly concerned about Fed Chair Jerome Powell's recent comments, where he emphasized the Fed's commitment to supporting a strong labor market. They questioned whether there is "ample room" in the current labor market to prevent inflation from reaccelerating if the Fed eases too much.
Piper Sandler posed a critical question: "Is Powell risking a 1968-1969 inflation repeat by easing aggressively with unemployment still near multi-decade lows?"
They contend that without a "sustained shift up in the unemployment rate," inflation may not decline as hoped. If the Fed eases too aggressively, the analysts warn, investors should be "very worried about inflation."