How to protect your portfolio against inflation
Orion Advisor Solutions chief invest strategist Rusty Vanneman shares his market predictions.
A key inflation gauge that revealed consumer prices rose at their fastest pace in decades last month could prompt the Federal Reserve to start laying the groundwork to begin curtailing its massive monetary support to the U.S. economy.
The Labor Department announced Thursday that the Consumer Price Index (CPI) surged 5% in May from a year prior, the fastest year-over-year jump since 2008. Excluding the volatile food and energy data, core inflation rose 3.8% from a year earlier, the quickest since June 1992.
The data could have significant implications for the U.S. Central Bank, according to Gary Pzegeo, head of fixed income at CIBC Private Wealth Management.
CONSUMER PRICES SURGE 5% ANNUALLY, MOST SINCE AUGUST 2008
"May’s CPI data could tip the scales toward an earlier tapering discussion, but should not cause alarm at the Fed," Pzegeo said. "The release was above expectations, but underlying price trends confirm the known impact of base effects and bottlenecks the Fed has categorized as ‘transitory’ for the past several months."
Although policymakers are publicly committed to holding interest rates rate near zero – where they have sat since March 2020 – until the economy reaches "maximum employment" and inflation moderately exceeds 2% for "some time," at least five Fed officials have suggested that discussions could take place soon regarding reducing the Fed's $120 billion in monthly asset purchases, a policy designed to keep credit cheap.
"It may be time to at least think about thinking about tapering," Philadelphia Fed President Patrick Harker said last week.
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Minutes from the Fed's April 27-28 meeting also suggested that officials were inching toward a conversation about weening its support for the economy. Although most policymakers agreed they need to see "substantial" further progress toward their goals of inflation and full employment, a "number" of officials said that "if the economy continued to make rapid progress toward the committee's goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases."
That was the clearest sign yet that Fed officials are starting to think about dialing back support and tightening monetary policy. Chairman Jerome Powell has been repeatedly asked about whether the central bank is "talking about talking about" reducing its quantitative easing program.
"No, it is not time yet," Powell said during an April press conference. "We have said we’ll let the public know when it is time to have that conversation, and we’ve said we’d do that well in advance of any actual decision to taper our asset purchases, and we will do so."
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There have also been confusing signals from the latest economic data; although inflation is rising, job growth has been anemic, with employers hiring far fewer workers than expected in both April and May.
"The mixed nature of these key releases may give the Fed some time before it has to consider removing the current extraordinary accommodation, but they will likely use either the statement or the Chairman’s press conference to note next steps in the discussion of tapering its asset purchase program," Pzegeo said.
Federal Reserve officials will hold a two-day, policy-setting meeting next week from June 15-16, where they are expected to shed further light on monetary policy and the state of the U.S. economy.
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