Social and Economic Structural Changes Faced by FRB
2025-04-14
■ The effect of the financial tightening policy is showing
■ The impact of supply-demand imbalance and structural changes
The effect of financial tightening policies in countries around the world has begun to show. Following the sharp deceleration in the eurozone during July-September, the growth rate of the United States is expected to slow significantly during October-December. Although the phenomenon of price increases in a wide range of categories has been confirmed, there are no clear signs of easing inflation. At the US Federal Open Market Committee (FOMC) meeting held on November 1-2, the policy direction was adjusted, suggesting that it would gradually return to the regular pace of interest rate hikes to observe the impact of the previous rapid interest rate hikes. However, Federal Reserve (FRB) Chairman Powell said that the ultimate target of the policy interest rate may be higher than previously expected, so the policy adjustment does not mean a fundamental change in policy direction.
Due to the stagnation of production and logistics caused by social distancing and movement restrictions, the significant deterioration of the economic outlook after the epidemic, and the lack of investment in energy production under the global decarbonization trend, the supply cannot keep up with the pace of normalization of demand, and supply-side constraints have become the main driver of current inflation. Financial tightening policy aims to balance demand with supply by suppressing it, so the focus of the policy is not to slow down the pace of interest rate hikes but to maintain a tight interest rate level for a long time.
Judging from the Federal Reserve's quarterly updated Summary of Economic Projection (SEP), the long-term expected levels of various indicators have not changed much before and after the epidemic, which seems to presuppose that the economy will return to its pre-epidemic state after the imbalance between supply and demand is resolved (Figure 1). However, irreversible changes such as the reconstruction of production systems and supply chains, the acceleration of digital transformation, and the popularization of remote work have already occurred, and the discussion on the changes in the social and economic structure in the post-epidemic era has not yet been fully launched. These changes are all adjustments on the supply side (productivity, capital stock, and labor), which will not only affect the actual GDP growth rate mainly measured by the demand side but also affect the potential growth rate based on the supply side. According to the growth accounting theory, the decline in the efficiency of resource (raw materials, capital, labor, etc.) utilization (i.e., productivity) will lower the potential growth rate*1.
The U.S. labor market has shown signs of structural changes, with the job vacancy rate rising to a historical high. Before the pandemic, when the unemployment rate rose to around 4%, the job vacancy rate would usually fall back to around 1.0 times, reflecting the balance between labor supply and demand. However, if the relationship persists after the pandemic, the unemployment rate may need to rise to around 6% to achieve balance (Figure 2). Factors such as the lower potential growth rate caused by the decline in labor input, the long-term inflationary pressure caused by the normalization of labor shortages, the tightening policy that exceeds the Fed's expectations, and the change in the neutral interest rate level may significantly change the characteristics of the economic equilibrium state. These issues will become the focus of discussion that cannot be avoided in future monetary policy formulation.
■ The impact of supply-demand imbalance and structural changes
The effect of financial tightening policies in countries around the world has begun to show. Following the sharp deceleration in the eurozone during July-September, the growth rate of the United States is expected to slow significantly during October-December. Although the phenomenon of price increases in a wide range of categories has been confirmed, there are no clear signs of easing inflation. At the US Federal Open Market Committee (FOMC) meeting held on November 1-2, the policy direction was adjusted, suggesting that it would gradually return to the regular pace of interest rate hikes to observe the impact of the previous rapid interest rate hikes. However, Federal Reserve (FRB) Chairman Powell said that the ultimate target of the policy interest rate may be higher than previously expected, so the policy adjustment does not mean a fundamental change in policy direction.
Due to the stagnation of production and logistics caused by social distancing and movement restrictions, the significant deterioration of the economic outlook after the epidemic, and the lack of investment in energy production under the global decarbonization trend, the supply cannot keep up with the pace of normalization of demand, and supply-side constraints have become the main driver of current inflation. Financial tightening policy aims to balance demand with supply by suppressing it, so the focus of the policy is not to slow down the pace of interest rate hikes but to maintain a tight interest rate level for a long time.
Judging from the Federal Reserve's quarterly updated Summary of Economic Projection (SEP), the long-term expected levels of various indicators have not changed much before and after the epidemic, which seems to presuppose that the economy will return to its pre-epidemic state after the imbalance between supply and demand is resolved (Figure 1). However, irreversible changes such as the reconstruction of production systems and supply chains, the acceleration of digital transformation, and the popularization of remote work have already occurred, and the discussion on the changes in the social and economic structure in the post-epidemic era has not yet been fully launched. These changes are all adjustments on the supply side (productivity, capital stock, and labor), which will not only affect the actual GDP growth rate mainly measured by the demand side but also affect the potential growth rate based on the supply side. According to the growth accounting theory, the decline in the efficiency of resource (raw materials, capital, labor, etc.) utilization (i.e., productivity) will lower the potential growth rate*1.
The U.S. labor market has shown signs of structural changes, with the job vacancy rate rising to a historical high. Before the pandemic, when the unemployment rate rose to around 4%, the job vacancy rate would usually fall back to around 1.0 times, reflecting the balance between labor supply and demand. However, if the relationship persists after the pandemic, the unemployment rate may need to rise to around 6% to achieve balance (Figure 2). Factors such as the lower potential growth rate caused by the decline in labor input, the long-term inflationary pressure caused by the normalization of labor shortages, the tightening policy that exceeds the Fed's expectations, and the change in the neutral interest rate level may significantly change the characteristics of the economic equilibrium state. These issues will become the focus of discussion that cannot be avoided in future monetary policy formulation.