From our April 2, 2021 issue of On Our Radar
For more than eight years (2012 – 2020) inflation was running below the Fed’s target of 2 percent. When asked about below-target inflation, the Fed’s response was the same; it was “transitory.” Consider the following:
“Inflation has been running below the Committee’s longer-run objective of 2 percent for some time and has been a bit softer recently. The Committee believes that the recent softness partly reflects transitory factors.” Chair Ben Bernanke June 19, 2013.
“As these transitory influences fade…the Committee expects inflation to rise to 2 percent over the medium term.” Chair Janet Yellen December 16, 2016.
“Core inflation stood at 1.6 percent for the previous 12 months. We suspect some transitory factors.” Chair Jerome Powell May 1, 2019.
However, after years of believing in their inflation theory and disregarding actual evidence, the Fed officially changed its monetary policy in September 2020 to address the below-target inflation. In fact, the Fed adopted flexible average inflation targeting. Since then, interest rates on the 10-year U.S. Treasury Note have more than tripled to approximately 1.7 percent.
What is interesting is that the median inflation projection of the FOMC participants is 2.4 percent in 2021, well above the current yield on longer-term U.S. Treasury securities. While it’s possible that the Fed is right and any inflation above 2 percent will be temporary – the 10-year inflation indexed security is still negative as seen below – it is also possible that the bond and stock markets may be tested by the highest level of inflation in many years.
This is something we are watching closely.