The cool phrase for this season is the “Hot Vax Summer” (credit to John Oliver). One side effect, as we have seen from the last two months of CPI prints, is that summer 2021 is also turning into the “Hot Inflation Summer.”

  • The Federal Reserve held steady its target for overnight rates to a range of 0 – 0.25%, as they have for more than a year
  • There were no material policy changes, and we continue to anticipate zero interest rates through 2022, possibly longer
  • Bond buying to continue at the current $120 billion/month pace ($80 billion USTs/$40 billion MBS) with no sign of taper in the text
  • The FOMC did increase the IOER rate in an effort to reduce some of the strains facing excess cash in banks and money market funds

Demand spikes in previously shuttered industries are causing prices to skyrocket, a phenomenon about which Fed officials officially don’t care, at least according to the June FOMC statement. Today, the FOMC announced they were holding interest rates unchanged at their June policy meeting and further made no material changes to the accompanying statement language.

As one might intuit from our intro, the biggest development since the Fed’s April FOMC meeting has been the release of inflation figures showing two months’ of price spikes: +0.9% and +0.7% for the monthly core CPI in April and May, respectively. Conversely, inflation fears in both the media and markets appear to be fading a bit, as evidenced by a May 15th peak in Google search results for the word “inflation” and the decline of long run inflation expectations to about 2.40% from a mid-May peak of 2.60%. In reality, the two CPI prints represent the demand side of the inflation story without any real supply response, the latter of which will take months if not a year to emerge (just imagine how long it will take to open a new restaurant after the last year—but it will happen). In any case, financial markets seem to be buying in more confidently into the Fed’s “transitory” inflation narrative, in and of itself reducing the incentive for the Fed to act in the short term to protect against higher inflation. It does not, however, stop the Fed’s financial warship from turning towards reducing accommodation, a process we anticipate will take the rest of the year.

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About the author

Guy LeBas

Director, Custom Fixed Income Solutions

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