The Daily Update: Patchy Recovery / Temporary Inflation

Today Jerome Powell will tell Congress that although the US economy is showing signs of sustained growth, it continues to be patchy, highlighting elevated unemployment levels along with inflation pressure, in remarks published yesterday ahead of a Congressional hearing. Whilst inflation pressures had ‘increased notably’, the data has been amplified by base effects and the easing of supply bottlenecks should slow the trend. He will also say that while the labour market is improving ‘the pace has been uneven’. The Fed’s Williams also said inflation is likely to rise to 3% this year before falling to near 2% in 2022. He said the Fed is watching the inflation data closely as price uncertainty abounds, and the economy is improving at a rapid rate. He added that inflation is still dealing with secular disinflationary forces.

We also had the Fed’s Bullard speaking at a virtual event. Bullard said the Fed needs to be able to adjust policy rate and/or tapering speed if inflation came faster than expected. Additionally, he does not expect QE to be on autopilot given the economic uncertainty and that the first interest rate hike could come before tapering has ended, however, that is not what he wants. He said ‘You probably don’t want to be in a situation where you would have to pull in rate hikes while you are still tapering, but the committee I am sure at this point would want to keep all options open. I am not really anticipating anything like that happening. We’re in a much stronger position with respect to reopening than we would have anticipated, and inflation has come along with it. We have to be ready for the idea that there is upside risk to inflation and for it to go higher. We have to be ready on both sides to be able to react to that, to stay contingent, to be nimble. The committee is only now starting to talk about tapering and it will take some time to get that organized and to get that running’.