Analysts point out that sustained inflationary pressures will not appear until 2022 at the earliest.
Russel Investments believes that the Fed will continue to intervene in the Treasury market until the US economy fully recovers.
Earlier, the Fed announced that it would keep its overnight interest rate near zero. This is in line with expectations because millions of Americans are still out of work, inflation is still below target, and the Fed wants to reach its target before raising interest rates. Russel Investments predicts that the Fed may withdraw its support for the economy by early 2024.
The level of long-term interest rates depends not only on the Fed's expected actions this year, but also on expectations over the next few years. Russel Investments believes that the yield on 10-year Treasuries will remain between 1.1 and 1.6 per cent by the end of 2021, meaning yields will rise only slightly from current levels.
Russel Investments believes that for 10-year Treasury yields, the key is when inflationary pressures will pose a threat to benchmark interest rates and how long the Fed's $120 billion-a-month bond-buying program will last.
01 the Fed wants higher inflation
Russel Investments said that for the stock market, the economic recovery phase tends to be a strong phase in the stock market cycle, when economic growth will be significantly above average. But for the bond market, what is more important is the level of economic activity than the level of economic growth, because the level of economic activity is the driver of inflation, and investors' pricing of bonds depends on inflation.
Russel Investments says many people misunderstand the cause of inflation. Some people may have heard of hyperinflation in Zimbabwe and think that printing money will lead to runaway inflation and currency devaluation. But in fact,The process of inflation is a little complicated.。
To put it simply, inflation can be understood as a balance.Supply and demandThe way. For example, at the micro level, if a parent wants to buy an electronic product for his child, he will have to pay more than the suggested retail price of the electronic product, because the market demand is too large relative to the number of electronic products available. So the price will be pushed up.
At the macro level, economists use aggregate demand and aggregate supply to describe the level of inflation. Aggregate demand is a function of consumer, business and government spending (that is, GDP); aggregate supply is a function of the quantity and quality of people and machines that meet this demand. The following figure depicts the output gap, a summary indicator that compares current demand with potential supply.
'when this line is above zero, it's a sign that inflationary pressures are accumulating, 'Mr. Russel Investments said. When this line is below zero, it indicates that deflationary pressure is dominant. So the reason why inflation slowed in early 2020 or early 2009 (when the Fed was frantically printing money and the US government implemented massive fiscal stimulus) was simple:Total demand is insufficient.
02 inflation is unlikely to continue to rise until next year
Russel Investments said that despite the massive fiscal stimulus and the gradual recovery of the economy, aggregate demand remains weak, especially for services.
Russel Investments predicts that strong economic growth in 2021 will help the United States get out of its current predicament faster than it did during the 2008 financial crisis.
In addition, it is worth noting that pent-up consumer demand is being released as more epidemic-related restrictions are lifted, and inflation is likely to soar in the short term later this year.
Powell said the same thing at the Fed's policy meeting last week, emphasizingThe rapid surge in inflation will be short-lived, not lasting.
Russel Investments agrees with this and believes thatSustained inflationary pressures will not appear until 2022 at the earliest.. The reason for Russel Investments's view is that their model shows that the US core consumer price index inflation index (PCE) is expected to hit 1.8 per cent by the end of the year, which is commonly used by the Fed to measure inflation.
As can be seen from the chart above, 1.8% is below the Fed's inflation target. For most of the past decade, inflation has been below the Fed's target. But the Fed is trying to keep inflation above target, so that means the Fed's easing will last longer.