Market Note: The Inflation Watershed

June 30, 2021Market Note: The Inflation Watershed

  • For over a decade, the Fed has struggled to hit its internal inflation target despite responding to every episode of economic weakness with increasingly extreme and experimental monetary policy, including 0% interest rates and widescale asset purchases.
  • Despite the Fed’s previous challenges to generate higher inflation, we are now at a watershed moment in which inflation could materially increase and affect broader markets. Indeed, inflation has already moved past the Fed’s former target of 2%.
  • Inflation will not increase in a straight line. For example, in early 2021, inflation expectations and bond yields appeared to be rising in an unhealthy trajectory, but that movement has since stalled, a potential confirmation that the reflation is slowing.
  • Taking a holistic view of government policy, market forces, and public opinion, we believe that inflation clearly poses a higher risk for investors than deflation in the coming years.
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