On June 16th, the world waited with baited breath the results of the June Federal Reserve Meeting. The Fed had been insisting that the price increases we have been seeing are “transitory,” so when the signaling came in a little more hawkish than anticipated, implying two rate hikes, markets took off in different directions. Treasury yields jumped to end the day at 1.5754%, and the S&P 500 ended the day in the red after plunging just after 2pm.
Since then, some narratives have emerged in the marketplace suggesting that the Fed actually no longer believes in the “transitory” perspective for inflation. So is this the Fed’s public confession that they were wrong about inflation being “transitory?”
Let’s first look at what the Fed actually did. The Fed kept its interest rate policy the same, between 0.00% and 0.25%. It also made no change to the bond purchase program. But two factors caught the attention of the markets. First is the 2023 median Fed Funds rate forecast of 0.6% versus March’s projection for 2023 of 0.1%. That’s a big jump and implies two rate hikes (one up to 0.5% and another up to 0.75%), although that second rate hike may be less probable. The second is the changes to the dot plot, where for 2023, the number of participants who see no changes to the rate policy changed from 11 members in March to only 5 in June. The significant change to the dot plot implies that rate changes are more likely in 2023. Certainly a shift toward a hawkish tone.
But, is this a public confession on the nature of inflation? While the Fed made upward revisions to its 2021 projection of the PCE Index (the Fed’s preferred method of calculating inflation) from 2.4% in March to 3.4% in June, the Fed still called it “transitory” in its FOMC press release, and the rather low estimates for future PCE inflation did not change significantly. In addition, the implied interest rate changes in 2023 finally gives us some definition around the term “transitory.” The Fed seems to be willing to wait through 2022 to let prices stabilize. If prices do not stabilize by the end of 2022, then they may change their view of the “transitory” nature of inflation and consider a change in policy in 2023. So it wasn’t really a confession – rather, it was an acknowledgement of the economic recovery and a timeline to the term “transitory.”
But then, as we sit in June of 2021, all of this may be a moot point for discussion because the voting members will rotate in 2022 and into 2023. And lastly, as Chairman Powell reminded us yesterday during the press conference:
“…this is an extraordinarily unusual time, and we don’t have a template or any experience of a situation like this. And so I think we have to be humble about our ability to understand the data… We need to be a little bit patient.”
We, at CBIZ IAS, believe the pandemic-related supply chain issues affecting these prices will keep prices high for the coming months. In determining whether or not these price increases will spur systemic inflation, we hope that patience and humility will keep us from misapplying normal time expectations to a once-in-a-century situation.
About the Author
Anna Rathbun serves as the Chief Investment Officer for CBIZ Investment Advisory Services. Her tenure with the firm has spanned economic and market research, portfolio construction, and creating insights in investment themes to share with the investment community. Anna began her career in investments at Wellington Management, and subsequently, Harvard. She has served as a Managing Director for a registered investment advisory firm where she specialized in alternative investments. She is a graduate of Harvard University with a B.A. in Economics.
Investment management services to individuals, corporations, trusts, endowments and foundations offered through CBIZ Investment Advisory Services, LLC, Registered Investment Adviser. For information about additional service offerings, please see the Form ADV 2A for CBIZ Investment Advisory Services, LLC at adviserinfo.sec.gov.