By Mark DeCambre
You couldn’t fault Wall Street for envisaging a bit of Hamlet in Jerome Powell at the Federal Open Market Committee’s June policy meeting this coming week:
Transitory, or not transitory?
Therein lies the question that the interest rate-setting Fed committee needs to answer for financial markets on Wednesday, at the conclusion of the FOMC’s two-day gathering.
Whether ’tis nobler in the mind to suffer the slings and arrows of outrageous inflation or to take arms against a sea of troubles, as Hamlet might have said if he had been a central bank governor.
Of course, no one is expecting fireworks at this coming meeting but it could still proof a pivotal point for stocks and bonds.
That is especially true with the S&P 500 index /zigman2/quotes/210599714/realtime SPX -0.02% , the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -0.36% , and the Nasdaq Composite Index /zigman2/quotes/210598365/realtime COMP +0.70% , hovering at, or near, record closing highs.
The Fed meeting comes against the backdrop of growing evidence of pricing pressures building in the economy as it recovers from the COVID pandemic of the past year and vaccination rollouts allow businesses to return to some semblance of normality.
Last Thursday’s consumer-price index report from the U.S. Labor Department showed that the cost of living surged in May and drove the pace of inflation to a 13-year high of 5%, reflecting a broad increase in prices confronting Americans.
“The critical question now is whether this elevated rate of inflation is ‘transitory’ or whether higher prices risk becoming psychologically entrenched,” wrote Matt Weller, global head of market research at Forex.com in a Friday research note.
The fixed-income market may already have had its say on inflation, with the yields on the 10-year Treasury note BX:TMUBMUSD10Y and the 30-year Treasury bond BX:TMUBMUSD10Y hanging around their lowest levels since at least early March.
Treasury and stock-market investors are viewing the surge in inflation as fostered by supply-chain distortions as consumers splurge after the pandemic, along with statistical base effects as last year’s falling prices drop out of the annual calculations, and therefore look to be fleeting.
It isn’t clear exactly, however, what transitory means — months, years ? How long are elevated levels of inflation to be tolerated before market participants and the Fed lose patience with inflation that undermines asset prices?
“Going forward to the end of 2021 and into 2022, policy makers continue to expect inflation to subside back down nearer their 2% objective, is a message the Committee is likely to reiterate at next week’s meeting,” wrote Lindsey Piegza, chief economist at Stifel in a Friday note.
“That being said, the U.S. economy is clearly gaining momentum, with the labor market adding more than 500,000 jobs a month. Therefore, while no policy adjustment is expected in June, nor an announcement of a timeline for an eventual adjustment to policy, at least some Fed members are expected to push for a discussion in the coming months regarding an eventual rollback of emergency measures,” she said.
Some traders, analysts and economists are betting the Fed will aim to articulate the view that the tapering of its $120 billion a month purchase of assets, implemented during the worst of the pandemic, will begin by towards the end of 2021.
The Fed may talk about talking about tapering in June and by August or September begin the work toward a roll back.