HomeInflation Fears Mount, Yet the Fed Remains Calm

Inflation Fears Mount, Yet the Fed Remains Calm

Once again, the United States leads the global recovery after an economic recession. It did it once in the aftermath of the 2008-2009 Global Financial Crisis, and it appears to do it again in response to the COVID-19-led recession. 

The success of the vaccination rollout in the United States is obvious if one is looking at hospitalizations and infections rate. Moreover, data from other parts of the world, such as from countries like the United Kingdom or Israel, confirm the vaccine’s efficacy, and optimism mounts for a quick return to life before the pandemic.

As the chart below reveals, the global PMIs are well back into expansionary territory, including the services PMI, a sector that was terribly affected by the virus. Therefore, the recovery is here, but what it took to get here and what will be the bill to pay in the future?

Inflation Concerns – The Higher in Over a Decade

While no one argues the necessity of supporting the economies and households, some questions arise as to what the future will bring. Judging by the most recent Google trends on topics such as inflation, people are becoming increasingly worried that inflation will get out of control on the back of the huge spending during the pandemic.

Both the Fed and the Congress over-delivered. Their joint actions will have a ripple effect on the global economy as trading partners will import the benefits of a rapid economic recovery in the United States.

The year only started for a couple of months, the first quarter is not even completed, and an additional $1.9 trillion already reached the economy. Moreover, the Biden’s administration already prepares the next “bazooka” – a $3 trillion spending plan designed to fight climate change and to reach some other long-term goals such as to reduce inequality.

In other words, one may see the $1.9 trillion already delivered as a short-term funding to help the recovery and households, while the new package is designed for the long run. Inflation, therefore, is just around the corner, as all data points to higher price levels in the period ahead. The big question is – how much higher?

The long-term yields exceeded 2% recently. For example, one can invest in a 30-year bond and receive over 2%/year for the next three decades – the risk-free rate. However, if inflation exceeds this rate, why would investors still fund the U.S. debt?

People fear inflation more than they did back in 2008-2009. The Fed’s credibility will be put to the test in the coming months, probably much sooner than anyone expects.

Join the Social Trading revolution. Connect with other traders, discuss trading strategies, and use our patented CopyTrader
eToro is the world’s leading social trading platform, offering a wide array of tools to invest in the capital markets
Largest number of currency pairs to trade
Open my Account

We use cookies to personalise content & ads, provide social media features and offer you a better experience. By continuing to browse the site or clicking "OK, Thanks" you are consenting to the use of cookies on this website.