Inflation: To be nervous or not to be nervous?

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Just a few things are impacting the financial markets this week: stimulus checks, inflation angst, the Fed, stepped up vaccinations, COVID loosening its grip and the reopen trade.

Let’s start with the first one: stimulus checks. The White House signed the massive $1.9T stimulus bill last week and checks are already hitting bank accounts this morning for those Americans that qualify for the $1,400 direct payments. Many states have already fully opened their respective economies with more on the way. Over the weekend, the U.S. vaccinated nearly 3 million people, a single-day record. Life is beginning to look normal once again. Great news for all of us, bad news for rates.

The Federal Reserve kicks off its two-day Fed meeting tomorrow and ends on Wednesday. There is a zero percent chance of a hike to the Fed Funds Rate which currently sits at .125%. What we are looking out for is inflation. The bond market senses inflation pressures but the Fed has not at this point. Treasury Secretary Janet Yellen has jumped in to help the Fed talk down inflation fears. Over the weekend, she said she sees inflation remaining subdued as the stimulus package gets rolled out and the economy regains its footing. Yellen feels the most significant risk we face is a “workforce scarred by a long period of unemployment”.

The inflation risk is evident in the rise in commodity, consumer and wholesale prices. Higher wages in the future could also add to these pressures. The health of the consumer is key to economic growth for it makes up 2/3s of economic activity.

Based off of all this information, we recommend floating your current files. Be mindful that if the 10-year yield closes above 1.60% today and gets “comfortable” at those levels, that means rates will go higher.

If you have questions or concerns, reach out to us today. We can help guide you to make the right financial decision for your situation.