Mizuho analysts have issued a warning about the potential consequences of the Federal Reserve’s current monetary policy, suggesting that if the Fed isn’t cautious, the U.S. economy could be headed for trouble.
“If the Fed isn’t too careful an accident is waiting to happen,” stated the firm in a note on Wednesday.
Mizuho points to various economic indicators that they note signal a shift in the labor market, which could prompt the Fed to pivot towards an easing cycle sooner rather than later.
As the U.S. labor market shows signs of slowing—evidenced by declining hiring rates, weakening payroll numbers, and rising unemployment—Mizuho believes the Fed will soon have to adjust its stance.
“It’s pretty likely the Fed is going to make a labor market ‘pivot’ as the precursor to starting the easing cycle,” the analysts wrote.
They argue that both the labor market and inflation could weaken significantly, with inflation potentially dropping below 1% next year due to the embedded weakness in U.S. money supply.
The note also points out that the current interest rates may be too high for an economy that isn’t strong enough, except for a few high-performing sectors.
Additionally, according to Mizuho’s analysis, the free cash flow to interest expense ratio for the S&P 500, excluding the technology and communications sectors, is now at its lowest point since the Global Financial Crisis.
Mizuho’s analysis suggests that investors should be prepared for a significant shift in the Fed’s approach as the economic landscape becomes increasingly fragile.
