Vaccines for All, Near-Term Monetary Focus

President Biden held his first prime-time address from the White House yesterday at 8:00 p.m. ET during which he reaffirmed an expectation that all adults in the U.S. would be eligible for a vaccine by May 1. This new target follows an earlier goal of 100M doses administered in his first 100 days in office. He said the country will hit this threshold next week, just 60 days into his presidency with the pace of vaccinations accelerating to more than 2.2M shots per day, according to the CDC. Although, to be fair, the U.S. was already approaching a pace of 1M shots a day when Biden was inaugurated, nearly guaranteeing the target of 100M within 90 days would be achieved. Nevertheless, the process is encouraging for businesses and workers, and individuals and families desperate to return to some semblance of normal. 

The President’s speech came just hours after he signed into law a $1.9T spending package, also known as the American Rescue Plan. It is being hailed as one of the largest economic stimulus measures in American history, as opposed to a coronavirus relief package, an important distinction as, according to the Committee for a Responsible Federal Budget, less than 10% of the package is COVID related. Either way, regardless of the description, the President promised stimulus checks will start to land in mailboxes by this weekend, a welcome prospect for many as 10M Americans remain unemployed and roughly 5M reliant on federal unemployment assistance.

Elated by further government support for the economy, the equity market gained ground yesterday. On Thursday, the Dow rose 188.57 points, or 0.6%, closing at 32,485.89, the S&P 500 was 1% higher, and the Nasdaq climbed 2.5%. This morning, equities are mixed with the Dow up 0.2%, while the S&P 500 is down 0.4% and the Nasdaq is down 1.6% as of 9:19 a.m. ET.

The bond market, meanwhile, continues to focus on the longer-run inflationary implications from a massive expansion of the government’s balance sheet, as opposed to the near-term benefit of artificial support. Yesterday, the 10-year rose 2bps to close at 1.54%. This morning, the 10-year is up 8bps, currently trading at 1.62% as of 9:22 a.m. ET.

Yesterday, the European Central Bank (ECB) opted to keep rates unchanged with the main refinancing rate at 0.00%, marginal lending facility at 0.25% and the deposit facility at -0.50%. The ECB also kept asset purchases unchanged at a total of 1.85 trillion euros ($2.21 trillion) due to last until March 2022.

While policy was broadly left unchanged at this point, officials continue to debate whether or not rising borrowing costs are a “threat” to the EU’s recovery, a concern the Federal Reserve is also focused on. Like the Fed, ECB President Christine Lagarde has not overstated concerns regarding the rise in yields, which are still low by historical standards, however, both the ECB and Fed are increasingly concerned about the impact of recent market action potentially slowing or stalling recovery efforts.

Meanwhile, according to the ECB’s latest projections, inflation estimates were little changed with a forecast for inflation to pick up modestly in the coming months and speeding up price growth for 2021; inflation is expected to rise 1.5% in 2021, up from a 1.0% forecast released in December. Inflation, however, is expected to moderate by 2022 at 1.2%, revised up from 1.1%, and 1.4% in 2023, matching the previous December estimate.

Next week the U.S. Federal Reserve is scheduled to meet. Like the ECB, policy makers are largely expected to leave rates unchanged at 0.25% with asset purchases steady at $120 billion.

Along with the statement, the Fed will also be releasing an updated Summary of Economic Projections, or SEP, which will likely show a somewhat stronger growth profile in the wake of an additional near $2T in fiscal spending and an acceleration in the vaccination initiative. As far as inflation, the Fed's near-term inflation outlook may also be revised slightly higher driven by recent weather effects, continued reflation as lower price readings from 2020 fall out of the annual calculation and a stronger growth forecast. As of December, the Fed anticipates 1.8% inflation this year and 1.9% in 2022, just shy of the Fed’s 2% target.

The bigger issue, however, is the Fed's continued expectation for modest longer-run inflation at 2.0%, despite rising market expectations and concerns over the massive expansion of the government’s balance sheet. The Committee's arguably nonchalant attitude towards potentially rising longer-term inflation pressures suggests policy makers are increasingly likely to respond to the recent backup in rates – if prolonged and perceived as “disorderly” – with additional tools to rein in higher yields on the longer-end. That being said, while willing and able, the decision for additional action is unlikely in the coming weeks, let alone days. In other words, we do not expect any announcement of further yield curve control or an Operation Twist-style adjustment to policy at next week’s meeting.

Additionally, aside from the pure capability to further manipulate longer rates, the Fed no doubt feels increasingly confident in its current policy stance, despite the risk or backdrop of rising inflationary pressures, given the increased flexibility afforded through the Fed’s updated policy framework. No longer defensive to an anticipated rise in prices, the Fed’s “new” flexible approach to inflation allows Fed officials to be reactive to a realized increase in prices. Furthermore, a new flexible average inflation target, or FAIT, will allow the Fed to potentially allow inflation to run “hot,” at least temporarily, removing pressure on the Committee to precisely engineer 2% prices or even begin liftoff with evidence of stronger price pressures. For example, with inflation averaging 1.3% over the past five years, there’s a potential for inflation to run near 3% for the next five without exceeding a longer-term average of 2%.

During the Q&A session following the rate announcement, the Chairman has an opportunity to expand on the Fed's perception of recent market volatility and whether or not it is yet seen as "disorderly." And if so, what the Fed plans to do about it. The Chairman will also be asked, no doubt, about the latest stimulus bill and the pressure this will create on longer-run inflation. The Chairman is likely to applaud the additional support to the economy – an economy Powell sees as still struggling to meet full employment and stable prices. Powell is unlikely, however, to focus or even acknowledge a longer-term threat from further government growth in the marketplace, instead insisting all efforts should be made to get the economy back on track here and now. 

Yesterday, initial jobless claims fell 42k from 754k, revised up from 745k, to 712k in the week ending March 6, the lowest level since the start of November. According to Bloomberg, jobless claims were expected to decline to 725k. 

A total of 81.1M applications for unemployment insurance have been filed since the end of March 2020 due to the impact of the coronavirus.

Continuing claims, meanwhile, or the total number of Americans claiming ongoing unemployment benefits, fell from 4.3M to 4.1M in the week ending February 27.

Also yesterday, the number of job openings according to the JOLTS – Job Openings and Labor Turnover Survey – rose from 6.8M to 6.9M in January, an eleven-month high.

On Wednesday, the CPI rose 0.4% in February, as expected, according to Bloomberg, and a six-month high. Year-over-year, consumer prices rose 1.7%, a one-year high.

Food prices rose 0.2%, and energy prices increased 3.9% in February, following a 3.5% gain in January. Excluding food and energy costs, the core CPI rose 0.1%, less than the 0.2% gain expected, according to Bloomberg. Year-over-year, the core CPI increased 1.3%, the weakest pace since June.

In the details, commodities prices rose 0.5%, and medical care prices increased 0.3%. Also, transportation prices rose 1.1% and recreation prices gained 0.6% in February, following two consecutive months of decline. Additionally, education and communication costs rose 0.1%, and housing prices increased 0.2%, thanks to a 0.3% increase in the OER. On the weaker side, apparel prices fell 0.7% in February, a four-month low.

This morning, the PPI rose 0.5% in February, as expected, according to Bloomberg, and following a 1.3% increase in January, the biggest monthly gain since records began in 2009. Year-over-year, producer prices increased 2.8% in February, the most since October 2018.

Food prices rose 1.3% following a 0.2% gain in January, while energy prices gained 6.0% in the second month of 2021. Excluding food and energy costs, the core PPI rose 0.2%, also as expected, and following a 1.2% rise the month prior, the largest gain on record. Year-over-year, the core PPI increased 2.5%, the most since April 2019.

Additionally, services costs rose 0.1%, thanks to a 0.1% gain in trade costs, and a 1.1% increase in transportation and warehousing costs.

Bottom Line: Consumer and producer prices inched higher at the start of the year with energy prices a primary culprit, along with the beginning of reflation in some of the hardest hit areas. Going forward, we expect some further upward momentum in prices as weaker price pressures from the height of the 2020 crisis continue to fall out of the equation. Month-to-month volatility aside, however, more broadly inflation is likely to remain modest as the economy continues to struggle to recover to a more organic activity framework. Of course, to further complicate issues for the Fed – and other monetary policy officials around the world – in the longer-run, massive government spending will most assuredly have significant and lasting inflationary consequences, something the market, as we noted above, is already beginning to focus on, resulting in a significant backup in rates on the longer-end in a relatively brief period of time. 

-Lindsey Piegza, Ph.D., Chief Economist