“Will Inflation Ever Float Away?"

MONETARY

• In the most recent release of the FOMC’s Minutes, staff projections for economic growth through 2021 continue to remain high, with further reductions in Covid-related measures contributing materially to both economic growth and significant decreases in unemployment¹
  • Regarding inflation, staff noted that “base-effects” are currently responsible for an abnormal YoY PCE inflation reading. However, staff expects Core Inflation to slow in the second half of 2021 but remain elevated north of the 2% mark¹
    • Staff specifically noted 3 transitory factors which were expected lead to higher than 2% inflation through 2021. These transitory factors included large increases in Import Prices, price normalization in still deflated areas of the economy, as well as continued supply-chain disruptions related to Labor Shortages¹
    • Staff projections have PCE Inflation dipping below the 2% mark in 2022 as effects from these transitory factors abate. A renormalization of 2% inflation was currently expected for 2023¹
    • Additionally, staff noted that risks to their inflation projections remained balanced, with upside risks including continued labor shortages and higher than average resource utilization. Downside risks to the inflation projections included potential drags from low underlying trend inflation, as well as a weaker-than-expected response to resource utilization¹
  • Participants also noted that the economy is still considerably far away from the Federal Reserve’s longer-run goals of maximum employment and price stability, and as such would continue to take an accommodative stance¹
    • In light of these observations, the Federal Reserve kept the target Fed Funds rate at a level of 0-.25%, and reiterated that it intends to continue its current pace of asset purchases at a rate of $80B of Treasury Securities per month, as well as $40B of MBS per month¹
• In his speech on U.S. monetary policy and economic outlook, Vice Chair Richard Clarida speaks to the transitory nature of recent pricing pressures⁷
  • (Clarida) “Over the next few months, 12-month measures of inflation are expected to move above our 2 percent longer-run goal, largely reflecting, I believe, transitory factors such as a run of year-over-year comparisons with depressed service-sector prices recorded last spring as well as the emergence of some supply bottlenecks that may limit how quickly production can rebound in certain sectors”⁷
  • Vice Chair Clarida also made reference to pricing pressures arising from current labor supply and demand mismatches, (Clarida) “But what this necessary rebalancing of labor supply and demand means for wage and price dynamics will depend importantly on the pace of recovery in labor force participation as well as the extent to which there are post-pandemic mismatches between labor demand and supply in specific sectors of the economy and how long any such imbalances persist.”⁷

 

FISCAL

• A bipartisan bill called the Chips for America Act is proposed by Congress that would include approximately $52B for semiconductor chip production & research over a span of 5 years³
  • Major provisions in the bill include $39B for production and R&D incentives, as well as $10.5B to implement new programs such as the National Semiconductor Technology Center and the National Advanced Packaging Manufacturing Program³
  • Initial projections have this bill resulting in about 7-10 new U.S. chip factories³
• In response to pricing pressures attributable to labor shortages, 24 states plan to voluntarily end their participation in the federal governments supplemental $300/week additional unemployment benefits program⁸
  • Missouri, Iowa, Mississippi, and Alaska plan to exit on the earliest date possible which is June 12⁸
  • Indiana, Alabama, Nebraska, West Virginia, Idaho, New Hampshire, North Dakota and Wyoming plan to exit on June 19⁸
  • Florida, Texas, Ohio, Georgia, Utah, Oklahoma, Arkansas and South Dakota plan to exit the program on June 26⁸
  • The average American is currently receiving $387/week in state unemployment benefits, which bumps up to $687/week after the federal supplement. Assuming a 40hr workweek, this equates to a wage of $17.17/hour which is more than 2x the federal minimum wage⁸
• Senate Republicans introduce a new infrastructure proposal that would entail $928B of spending over a span of 8 years⁹
  • Latest offer comes in response to a reduced proposal by the White House which decreased its original proposal of about $2.3T to a level of $1.7T⁹
  • The major obstacles in negotiations remain centered around the scope of the infrastructure package, as well as how to finance the spending⁹
  • In the absence of a bipartisan agreement, the budget reconciliation process will likely need to be used in order to pass any form of infrastructure-related legislation⁹

 

GEOPOLITICS

• The United States and the European Union reach an agreement to avoid an escalation over U.S. steel and aluminum tariffs²
  • As part of the agreement, the European Union will delay for six months a doubling of its tariffs on existing items, as well as refrain from adding tariffs to new items while the two parties attempt to reach a formal long-term agreement²
  • The U.S. will keep its existing tariffs in place for the time being which include a 25% tariff on steel and a 10% tariff on aluminum²
  • The E.U. will also keep its existing tariffs in place while negotiations take place which include tariffs on motorbikes, whiskey, and orange juice²

 

VACCINE

• FDA grants an expanded emergency use authorization to Pfizer-BioNTech’s COVID-19 vaccine to allow for its use in adolescents aged 12-15⁴
• CDC is currently investigating multiple reports of heart problems being experienced by adolescents and young adults who have received both doses of mRNA vaccines⁵
  • Specifically, a heart condition known as myocarditis has been linked to those reports. The FDA noted that symptoms have tended to occur within four days of the second dose being administered⁵
  • The FDA has not specified which vaccine, whether Pfizer or Moderna’s, has been linked to the reports⁵
• CDC updates its guidelines for individuals that have been fully vaccinated. Updates to guidance include the following (referenced directly from CDC website)⁶
  • (CDC) “You can resume activities that you did prior to the pandemic”⁶
  • (CDC) “You can resume activities without wearing a mask or staying 6 feet apart, except where required by federal, state, local, tribal, or territorial laws, rules, and regulations, including local business and workplace guidance”⁶
  • (CDC) “If you travel in the United States, you do not need to get tested before or after travel or self-quarantine after travel”⁶
  • (CDC) “You need to pay close attention to the situation at your international destination before traveling outside the United States”⁶
  • (CDC) “If you’ve been around someone who has COVID-19, you do not need to stay away from others or get tested unless you have symptoms”⁶

 

[See Below for Disclosures & Annotations]

DISCLOSURES

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

The companies presented here are for illustrative purposes only and are not to be viewed as an investment recommendation.

 

ANNOTATIONS

1. Federal Reserve. “Minutes of the Federal Open Market Committee, April 27-28, 2021”. May 19, 2021
2. Reuters. “U.S.-EU metals talks avert tariff hike on American motorcycles, whiskey”. May 17, 2021
3. Reuters. “U.S. chip funding could result in seven to 10 new factories – officials”. May 24, 2021
4. FDA. “Coronavirus (COVID-19) Update: FDA Authorizes Pfizer-BioNTech COVID-19 Vaccine for Emergency Use in Adolescents in Another Important Action in Fight Against Pandemic”. May 10, 2021
5. USA Today. “CDC investigating cases of heart inflammation in teens, young adults who got two-shot COVID vaccine. Here’s what we know.” May 24, 2021
6. CDC. “When You’ve Been Fully Vaccinated”. May 16, 2021
7. Federal Reserve. “U.S. Economic Outlook and Monetary Policy”. May 12, 2021
8. Forbes. “Florida The Latest State Dropping $300-A-Week Federal Unemployment Benefits”. May 21, 2021
9. The Wall Street Journal. “Senate Republicans Unveil $928 Billion Infrastructure Offer”. May 27, 2021