The Anomaly of High US Profit Margins and a Tight Labor Market

The U.S. economy’s performance this year has been an enigma for many people. Real GDP growth has been stronger-than–expected while inflation has fallen more quickly than expected. Despite this, the Federal Reserve raised the federal funds rate to a 22 year high of 5.5 percent at the July FOMC meeting, and it has left door open to added tightening. The main reason: The Fed is worried that the tight U.S labor market could keep wage pressures elevated and hinder its efforts to get inflation back to 2 percent.

Nonetheless, equity investors appear unfazed by the Fed’s actions. The S&P 500 index has returned 20 percent so far this year, while the NASDAQ
NDAQ
index is up by nearly 38%. In the process, these markets have recouped most of last year’s sell-off.