Current Events: Expectations of Inflation

Fed Chair Powell gave some interesting remarks at yesterdays (3/16/21) meeting. Taking a deep dive into his comments we can glean some pretty important thoughts on monetary policy and the market conditions looking forward.

• Rates will likely not be increased for at least three years.
• Unemployment is expected to start tilting down; expectation of 4.5% from 5%
• Growth expectations increased; projected 4.2% upgraded to 6.5%
• Inflation will remain around the 2% target for the foreseeable future with some brief EXPECTED spikes at certain time frames

Let us explore why these are the expectations. In short, reopening’s are going to have large and impactful spikes in these numbers. Because of that there are going to be some temporary spikes in consumer prices as companies that are reopening are being fed by pent up demand. Powell added, "as the economy re-opens, people will start spending more. You can only go out to dinner once per night, but a lot of people can go out to dinner. And they're not doing that now, they're not going to restaurants, they're not going to theaters...and travel, and hotels, that part of the economy is really not functioning at full capacity." Also likely is that as time frames shift, inflation spikes will happen and then fall off, as an example the pre-covid numbers will begin to fall off the time frame as we head into April and subsequently May. All these expectations are part of the American recovery story as we begin to genuinely move beyond Covid lockdowns.

Long-term no one believes we are going to have 6% year over year growth and the expectations is that as demand wanes so to will growth. Additionally, the Fed collectively feels that the economic conditions are a long way from the goals they have established for unemployment and inflation – this means a few years of easing (albeit potentially passive) followed by slow growth. The Fed is going to play a critical role in the management of recovery future.