Inflation is the watchword as the Federal Reserve kicks off a two-day meeting on Tuesday. Monetary policymakers have so far stuck to the script, maintaining that recent price increases on everything from metal to meat will be short-lived and look more dramatic than they really are because of the drastic depths to which the economy had plunged a year ago.
“The headline numbers are scary, the reality isn’t nearly that scary,” said Brad McMillan, chief investment officer for the Commonwealth Financial Network.
McMillan said it makes more sense to look back two years rather than one to get a more accurate sense of the current levels of inflation. “Year-on-year is usually a good, consistent measure in normal times, but unusual times require unusual statistics,” he said.
David Norris, head of U.S. credit and portfolio manager at TwentyFour Asset Management, said he expects Federal Reserve Chairman Jerome Powell to stick with the term “transitory” in describing the current level of inflation in his press conference Wednesday afternoon after the meeting concludes. “However, what I will be looking for are any discussions on what could be termed as more permanent inflation,” he said.
Still, with investors looking for reassurance, Powell might seek to deliver that in his remarks on the Fed’s huge bond-buying program — albeit only in the most circumspect manner. “If they do anything, I think it would be more a nod towards thinking about thinking about a taper,” McMillan said.
“I do believe we will see more dialogue on the potential for tapering and that inflationary fears are increasing,” Norris said.
It’s a delicate balancing act.
“I think this is going to be Powell's toughest conference in his career as chairman,” said Dan North, senior economist at Euler Hermes North America. A more definitive announcement, such as an actual timetable for dialing back bond-buying, would likely spook markets — but not addressing inflation at all also has the prospect to jangle nerves on Wall Street and, North said, potentially dent the Fed’s credibility. “He's in a pretty difficult position either way,” he said.
Price stability is just half of the equation. The Fed faces another challenge on its plate when it comes to fulfilling its mandate for full employment, a new report shows: The New School’s Schwartz Center for Economic Policy Analysis found that the pandemic accelerated retirement for 1.7 million members of the workforce. “Many older workers were pushed into unplanned retirement earlier than they would in a ‘normal’ year,” the report said.
“That’s going to make it a tougher choice because that becomes a huge demographic issue for the Fed,” North said. “We’ve had a structural shift.”
Labor force participation, especially for women, plunged since the pandemic hit, and the New School research found that older workers were pushed out of the labor force at a higher-than-usual rate by job losses and health concerns. Black workers without a college degree experienced the sharpest acceleration in the share of workers who retired before the age of 65, with an increase of 1.5 percentage points, according to the analysis.
“We still have millions of people unemployed,” McMillan said. “We’re in the middle of what appears to be a transition in how the workforce works because of that. When you talk about the dual mandate, historically, the Fed has been almost exclusively focused on inflation. That’s not the case anymore,” he said.
Powell and other Fed officials have talked about both the imperative to wield monetary policy in a fight against these kinds of inequities along with the limitations of an agency whose authority has often been characterized as “lending, not spending.”
“My read is the Fed takes seriously the second part of the mandate and is looking at the K-shaped recovery,” said Darren Schuringa, CEO of ASYMmetric ETFs. “People who are living paycheck to paycheck are not benefiting from the liquidity in the stock market,” he said.
Rising wages could distribute more of the recovery’s gains to lower-income Americans and marginalized populations, but investors fret that a wage-price inflationary spiral could be hard for the Fed to control once set in motion.
“The labor market shortage and surging demand is causing companies to raise wages. This can spark inflation as they are forced to raise prices to make up for the rise in wage costs,” Megan Horneman, director of portfolio strategy at Verdence Capital Advisors, wrote in a client note. There are indications, she added, that this feedback loop is already taking place in the small-business sector.
If wage gains fail to materialize or keep pace with the price of goods, though, their benefits might not amount to much, North said. “If we keep accommodative policy and that spurs inflation, that’s very hard on lower-income people,” he said. “They have less margin, in terms of income each month, to spend, and inflation’s going to eat into that.”