Pro Perspectives 2/23/21

February 23, 2021

Inflation was a hot topic in Jay Powell's testimony to Congress this morning.

Some of the senate was clearly concerned about the risks of a spike in inflation.  Powell, was not. 

Even with the aggressive move in asset prices, hot import/ export prices, hot economic data and an economy that, Powell admits, could run as hot as 6% growth this year (even before another massive fiscal spending package), he continued to downplay concerns about inflation.

Moreover, he said the greater risk to inflation is on the downside.

Does he mean it?  I doubt it.  But it's his job to signal to markets that rates will stay ultra-low and QE will continue.  As part of that signaling, Powell (and the Fed) continue to promote an extremely passive plan toward addressing a ramp in inflation when/if it rises above their target of 2%.  

Make no mistake, this is meant to set expectations that the Fed will be providing maximum support for years.  The intent is to keep the constraints off of the recovery, at this stage.

When we do get a rise in the Fed's favored inflation measures, I suspect we will see them act, not sit on their hands.  And perhaps the Spanish Flu era inflation is a good lesson on why they need to be ready.  From 1917 to 1920, U.S. inflation averaged 16%.  Stocks did well to, but produced little-to-nothing after adjusting for inflation.