February 28, 2021





     And the hits just keep coming.  In addition to variants to COVID-19 increasing, the Polar Vortex or a strong Artic winter storm knocked out utilities to a large swath of the country.  Along with spreading misery and devastation to places not accustomed to dealing with temperatures near zero and snow, it will likely cause a temporary hit to some of the nation’s largest and most rapidly growing economic regions.

     The storm is only one factor for the Federal Reserve to reaffirm it will continue actions to bolster the U.S. economy in its twice-yearly update to Congress.  “Monetary policy will continue to deliver powerful support to the economy until the recovery is complete,” the Fed’s report said.  The main takeaway is that the FOMC will maintain near-zero interest rate policy for some time and its monthly purchase rate of $80 billion Treasuries and $40 billion of Agency mortgage-backed securities for the foreseeable future.

  Markets Inflation



     Based on the minutes of January’s FOMC meeting and Fed Chairman Powell’s testimony to congressional committees, the Fed is more focused on the labor market rather than inflation.  The minutes noted, “the economy was far from achieving the Committee’s broad-based and inclusive goal of maximum employment and that even with a brisk pace of improvement in the labor market, achieving this goal would take some time.”  The Treasury market seems to be less certain and more cautious about inflation than the Fed.  Market-based measures of higher inflation expectations have been rising.  Longer-term interest rates have been moving higher in February as expectations of stronger growth post-pandemic continue to grow.  Supporting those expectations have been economic data and the likelihood of further fiscal stimulus.  Further fiscal stimulus would need to be funded by more Treasury supply.  With Treasury Secretary Yellen reportedly studying a 50-year maturity, the long-end rates have responded accordingly.  With the Fed’s policy of making roadkill of short rates, the Treasury yield curve has taken on a steeper profile.

Yield Curve



     Excluding the labor market, which continues to sputter, the economy opened 2021 with renewed momentum.  The Fed’s goal of full employment is nowhere close and still almost 10 million fewer jobs than there were prior to the pandemic.  Still, the economy makes progress.  Industrial production picked up in January.  January’s retail sales and personal spending reflected American’s propensity to spend and consume.  Personal income also rose, lifted by the second round of individuals’ stimulus payments, which supported the rising in spending.  The housing market continues to be an area of strength.  This is likely due to a combination of low interest rates and demand for suburban or low-density housing.  The Conference Boards’ Leading Economic Index moved higher last month, marking its ninth consecutive monthly increase.


LEI Advanced


     The government and the Fed have aggressively stepped in to support the economy.  Multiple rounds, with more likely, of direct aid have left many households flush with excess savings which coupled with pent-up demand, especially for services, could lead to robust consumer spending that causes prices to shoot higher.  Both the stock and bond markets are discounting and pricing in strengthening growth and price pressures as vaccinations rise and the number of coronavirus infections decline.  The Fed’s commitment to reaching a “fuzzy” employment goal could lead to too much accommodation rather than too little.  In August of 2020 the Fed approved a change in its approach to setting interest rates by dropping definitive goals.  The new framework is reactive, not proactive.  There is already some criticism of the Fed’s policy of misallocation of capital in forcing individuals and financial institutions to take irrational risks and create zombie companies instead of creative destruction of unhealthy and unprofitable firms.  Our conclusion is that the Fed will have to move forward plans for QE tapering and interest rate policy adjustments.