Divergence of Inflation Expectations

Michael Rudd, CFA | President, CEO and Portfolio Manager

This past week, you may have noticed some reaction in stock and bond markets to Wednesday’s Federal Open Market Committee (FOMC) meeting. This is the meeting where the US Federal Reserve governors set interest rate policy and communicate their expectations to the investment and business community. We noticed multiple quotes from business leaders this past quarter (see below) with respect to inflationary pressures, so it makes sense that this was a well followed and publicized event in the financial press.

“…we’re certainly seeing an incredibly inflationary environment. I think that’s true in what you’re seeing across the industry, on both the retailer side, the manufacturer side, and supplier side, it is intense for sure.” – Clorox (CLX) CEO Linda Rendle

“…we are seeing inflation on all sides. We’re seeing inflation in raw material labor and logistics…we’re continuing to push back on suppliers….”- 3M (MMM) CFO Monish Patolawala

  • The FOMC governors moved the dot plots higher (Figure 1), which indicates that most governors now expect an increase in administered rates in 2023. This also means that quantitative easing would have to start decreasing in the coming months as well.
  • One interesting observation is that medium term rates were much more impacted by the changing views than long term rates (Figure 2). This implies that the market believes that while inflation could increase over the next 5 years, it will ultimately be brought under control. The faith in the US central bank remains unwavering.

“This means that” there are two paths that we will focus on. A good strong economy with managed increased inflation over the medium term that will ultimately be a benefit to North American and International economies or that the strength leads to unmanaged inflation. At this point, we need more time to pass before we can decide, but we will be watching closely.

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