The Fed and Inflation
The Fed’s Policy Statement last Wednesday rocked the bond and stock markets with these points or stats—
· They believe our GDP will increase by 7% this year up from 6.5% previously.
· They are predicting that PCE inflation this year will increase by 3.4%, up from 2.4% 6 weeks ago. This is a BIG increase!
· But they are predicting that inflation will only be 2.1% next year.
· The Fed will keep buying $120 billion a month of Treasuries and mortgage bonds. I know Barry Habib believes they are buying much more and that is why they are no longer publishing their asset purchases.
· Chairman Powell said the Fed will only start tapering after it provides notice “as far in advance as possible.”
· Further, Powell said the Fed is now officially “talking about talking” about tapering their balance sheet purchases.
· When you review all 18 Fed members’ predictions for short-term rates, we see 7 of them believe the Fed will raise rates by 25 bps next year, up from just 4 of them earlier this year.
· And for 2023, 13 of them believe they will need to raise short-term rates.
· Chairman Powell during his press conference raised the possibility of inflation running hotter than their predictions and that inflation could be “higher and more persistent” that could cause the Fed to adjust their monetary policy.
After the release of their Policy Statement the mortgage bond market suffered a 58 bp price drop. But, at the end of the week the market had regained 40 bp in pricing which really surprised me.
Finally, St. Louis Fed President James Bullard spoke on CNBC last Friday and here is what he said—
· He believes the Fed is surprised with how much inflation we have seen and he thinks there is an upside risk to their inflation forecast.
· He believes inflation will rise higher as more states open up for business (I am thinking of California) and as other countries’ economies start to reopen.
· Bullard believes that PCE inflation will average 2.5% next year.
· He believes that the Fed should not be buying mortgage bonds during a booming housing market as doing so could lead to a housing bubble.