If we have learned anything it is that nothing is certain
The Federal Reserve’s perceived more hawkish shift at this week’s interest-rate setting meeting sent the financial markets into a flurry on 16 June. Investors interpreted the step-up in inflation projections and earlier-than-expected rate hikes projected in the “dot plot” as confirmation that inflation may be more than transitory.
Of the 18 officials, 13 vs seven saw at least one rate hike in 2023, bringing forward the likelihood of rate increases by a year, and increased inflation forecasts to the end of 2023, with inflation expected to rise to 3.4% in 2021 vs March’s 2.4% forecast. In 2022, however, the increase was a marginal 10 basis points to 2.1% from 2% previously envisaged – in line with the Fed’s average inflation target range, which reflects the central bank’s ongoing view that current inflationary pressures will prove temporary.
Fed chair Jerome Powell warned against engaging in premature conversations about raising rates. He added that this was an extraordinarily unusual time, saying: “We really don’t have a template of any experience of a situation like this. So we need to be humble in our ability to understand the data.”
Fears of inflation-prompted tapering by the central banks continue to widen the schism between the inflation hawks, who expect inflation to become a real problem, and doves, who see the current ramp-ups in inflation to be transitory too.
It is not just the inflation views that have become unusually polarised. Perspectives on issues like health, the economy and the financial markets have also landed up being poles apart, perhaps because the future is so uncertain and the only degree of control anyone has is standing steadfast in their views of the future.
As the pandemic has progressed, it has become increasingly clear that these are uncharted waters, with no previous period in history against which to compare. Moreover, actual economic outcomes over the past year have also proved it is impossible to extrapolate previous circumstances into the future with any degree of confidence.
In the wake of the Fed’s Federal Open Market Committee meeting, inflation is likely to remain the hotbed of highly divergent views. High-profile inflation hawks are likely to be even more convinced that inflation is here already and here to stay. At the same time, the doves will continue to side with the central banks in believing that inflation is likely to prove transitory once the glitches in the global macro-economy have worked their way out of the system.
Powell believes that price increases have been directly affected by the pandemic and the opening of economies. Prices, which have moved up quickly because of shortages and other factors, will come down again. He says the Fed has committed to providing “a lot of notice and transparency to allow people to adjust their expectations” but notes that it is “a ways away” before we see further progress on monetary policy.
However, those with pessimistic outlooks on inflation have also been accused of being prematurely hawkish – and, if the latest Bank of America Global Fund Manager survey is anything to go by, the majority view falls in favour of inflation proving transitory and Fed tapering expected to be peaceful.
Of the 224 fund managers surveyed, 72% said inflation was transitory and 23% said it was permanent. But they did see inflation and a possible taper tantrum as the top tail risks facing the financial markets, with asset bubbles, Covid-19 and a slowdown in China’s economy the other key risks foreseen.
The results of the survey, published before the meeting, also showed that 63% expected the Fed to signal when it was likely to taper in August/September, either at the Fed’s Jackson Hole meeting or the September Federal Open Market Committee meeting.
The anticipated timing to reflected in the Global Fund Manager survey, aligns with the outcomes of a Reuters poll of more than 100 economists, with some 60% anticipating a taper announcement during the third quarter, the balance in the fourth quarter.
Powell did pave the way for discussions around tapering, saying, “You can think of this meeting as the talking-about-talking-about meeting.” But he did not commit to when the actual talking about beginning to unwind the central bank’s $120-billion monthly asset purchases would take place.
Until those conversations begin, it would be a fool’s errand to try to predict definitively what inflation is likely to do as the world tries to gain a firm post-pandemic economic footing. If the events of the past year have taught us anything, it’s that surprises are more than likely to be par for the course.