The Fed & Inflation

June 17, 2021

The Federal Reserve on Wednesday said it might hike interest rates earlier than it had previously expected, penciling in two rate hikes in 2023. In its statement though, the Fed stuck to its guns and said the recent burst of inflation would be transitory. 

But time and again during his news conference, Fed Chairman Jerome Powell stressed he and his colleagues were attuned to the risk that inflation could rise faster and last longer than expected.  The Fed forecast that inflation would move up to 3% annual rate this year but would then drop sharply in 2022. Even this forecast builds in slower inflation in the coming months, economists noted.

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.  In an outcome that was more hawkish than expected, the Fed’s dot plot chart showed 11 of 18 officials expect at least two rate hikes in 2023. In March, only seven expected one hike. Seven officials now see the first hike next year, up from four in March.

Our strategy at Windsor is well prepared for rising rates.  Staying well diversified in the fixed-income class, as well as maintaining a short duration, puts our clients in a position to take advantage of higher rates down the road.  In fact, we would we would welcome higher rates as long as they increase in an orderly fashion.  Keeping your portfolio well balanced with both equities and fixed-income will help offset a steady increase in inflation.  However, we do side with many economist who see the current inflationary spike as transitory. 

Make sure to contact your Windsor manager with any questions.