Friday, June 25, 2021

Inflation and Fed Begin to Shift Economy

Inflation is beginning to increase for a broad range of goods and indicators. The Federal Reserve has just announced expected interest rate increases moved up from late 2023 to early 2023 and the economy, especially the investment markets, is beginning to take notice.

  • Core inflation was projected at 2 percent in 2021 and it’s now projected near 5 percent. The Federal Reserve and most economists expect the surge to be transitory, but the increase was substantial and the tight labor market suggests employee inflation, which is less transitory than commodity inflation.
  • The Federal Reserve announced that rates will likely begin to increase early in 2023, not later. Also, the Fed is “tapering” its quantitative easing that reduces bond (asset) purchases.
  • Clearly, the Fed has conflicting priorities. Although unemployment is still high (6%), it is dropping and tax revenue up as economic growth gains momentum from reopening.
  • But, the market is recognizing inflation, even if temporary, and Federal Reserve rate increases will cause economic shifts and frame a new allocation of investments.

Expect volatility as the transition goes on; the market just staged a 590 point comeback after last week’s worst since October.


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