MRM Commentary


Monthly Investment Commentary

December 2021

      Economic Update

              • A predominant buzzword for 2021, “transitory” may need to be retired as a description of inflation risks according to Fed.
              • A demand shock from trillions in fiscal and monetary stimulus continues to overwhelm supply, causing more dovish leaders at the Fed to reconsider prior plans to leave the fed funds rate unchanged in 2022.
              • Detection of the Omicron variant was another reminder that Covid remains a stubborn risk to global growth and inflation expectations nearly 2 years after the start of the pandemic.

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      MRM Portfolio

      If there was a ranking of economic buzzwords for 2021, the term ‘transitory’ would have to be near the top of the list. This word has been used over and over by Fed Chair Jerome Powell and his colleagues to describe inflation pressures emerging from the reopening of the global economy. However, inflation rates, even after excluding food and energy prices, have remained stubbornly elevated near multi-decade highs, making inflation a hot topic in mainstream media and politics. The latter has shined an even brighter light on Powell, who was at the same time vying for a second term as Fed chair. Competing with Powell for the top job was Fed Governor Lael Brainard, who was generally perceived to be more dovish of the two (a very relative comparison). Given the heightened public focus on rising consumer prices, the dovishness was likely a notable factor in the White House’s decision to announce on November 22 that Powell would indeed get the nod for a second term. The bond market responded to the news by pricing for more hawkish policy in the near/intermediate term.

      On November 30, in his first major appearance since the nomination announcement, Powell caught markets off guard with a definitive shift in tone regarding inflation risks. Testifying before the Senate Banking Committee, Powell effectively extinguished the transitory inflation assessment. When pressed on the topic, Powell said, “I think it’s probably a good time to retire that word and try to explain more clearly what we mean.” In other words, the price increases of the last several months may indeed be more permanent than the Fed had been anticipating, and as such, a more hawkish policy response may be necessary. To that end, Powell also noted potential policy changes to combat non-transitory price pressures, specifically the pace of asset purchase tapering. “At this point, the economy is very strong and inflationary pressures are higher, and it is therefore appropriate in my view to consider wrapping up the taper of our asset purchases…perhaps a few months sooner,” he said. At the November 3 FOMC meeting, the Fed announced, as expected, a tapering pace of $15 billion per month, which would imply no new purchases (other than principal reinvestment) by the end of Q2. Shortening the pace by three months would increase monthly tapering by approximately $10 billion (~$25 billion total).

      MRM'S VIEW

      The impact of massive stimulus should eventually fade, and demand for goods and services should eventually realign with supply. Timing is everything, though, and there’s only so long that central bankers can idly stand by while inflation runs more than double the target rate. 2022 will certainly test Fed leaders on that front.

      Source: ALM

      MRM model holdings as of September 30, 2021



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