“Don’t fight the Fed” is an old saying that never seems to go out of style. The reference reiterates the importance the Federal Reserve (the Fed) has on the financial markets. The Fed exercises interest rate policy to address its two objectives; maximum employment with stable prices.
The June Federal Reserve Meeting gave bullish and bearish investors something to ponder. On the bullish side, the Fed reiterated the extremely strong economic backdrop. The Fed tied the growth directly to the increased consumer demand from a reopening economy. On the bearish side, higher rates may need to be initiated sooner than previously expected. The strong economic backdrop may raise rates in 2023 instead of 2024, still a long way off. The Fed cited a protracted reopening period with labor market influences contributing to a potentially longer transient inflation.
Employment growth, one the Fed’s main objectives, has slowed over recent weeks. Even with a record number of job postings, unemployed workers are not exploring employment opportunities. The lack of employed workers is having an undue inflationary effect as the labor providing goods and services has not kept pace with consumer demand. Admittedly, demand (or lack thereof) can change faster than supply, hence current inflationary pressures are likely transitory and temporary. Ultimately, supply will complement demand.
Inflation seems to be the topic du jour, much of which is ushered in by the lack of workers. But will we see ‘70s style inflation? It’s extremely unlikely. The ‘70s economic environment was vastly different from today. Most notably is the ‘70s saw a tremendous demographic labor push as baby boomers moved into the workforce. Also, the ‘70s lacked today’s exponential technological implementation.
The Fed’s meeting notes as well as separate comments from the Fed Chairman, Jerome Powell, is giving most of the credit/blame to a quicker economic reopening than anticipated. Clearly, the economic reopening is correlated to the vaccine rollout. Total economic output is expected to surpass pre-pandemic levels this quarter. In more concise language, the speed of the economic progress is very promising while also causing temporary obstacles.
We hope you are looking forward to your summer vacation as many missed vacations in 2020. Don’t forget the sunblock. Have a great weekend.
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