By Ryan Murphy
Director of Marketing

In his address to the media two weeks ago, Federal Reserve chairman, Jerome Powell, acknowledged inflation concerns but remained unwavering in his commitment to low interest rates in the face of still-high unemployment.

“We’ve still got a lot of people who are out of work,” Powell said in his news conference following the Fed’s two-day policy meeting. “We want to get them back to work as quickly as possible, and that’s really one of the things we’re trying to achieve.”

Private sector employment isn’t generally the focus of a Federal Reserve chairman, but these aren’t ordinary times. And Jerome Powell, not being from a traditional economics background, isn’t an ordinary chairman. He’s staking his legacy—and shaping the future of monetary policy—by casting aside 40 years of regulatory orthodoxy and embracing the possibilities of a little short-term inflation.

“Some of the asset prices are high,” he went on. “You are seeing things in the capital markets that are a bit frothy. That’s a fact. I won’t say it has nothing to do with monetary policy, but it also has a tremendous amount to do with vaccination and reopening of the economy.”

He also thinks some of the price increases you’re seeing might have as much to do with lingering supply chain inefficiencies as all the pent-up consumer demand unleashing itself upon our unsuspecting economy.

“These one-time increases in prices are likely to only have transitory effects on inflation,” he said.

In plain language, Chairman Powell is willing to let consumer prices exceed the central bank’s stated two percent inflation goal for a short while in order to get employment numbers back into an acceptable range. He’s making a calculation that the logistical factors making things like lumber and semiconductors scarce will subside before interest rates need adjusting.

Nonetheless, he’s got the finance industry tying itself in knots trying to predict the timing of the seemingly inevitable interest rate hikes. They have to be coming, right? Right?! 

Well, maybe they are; maybe they aren’t—or not in the way we’ve seen in the past. Because it’s clear monetary policy makers aren’t following the old playbook.

But how does all of this affect markets, you ask? I sat down with EdgeRock portfolio manager, Rob Foss, to find out.

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Ryan: The U.S. Bureau of Labor and Statistics hit us with a couple of reports in the last week that indicate a number of challenges our economy still needs to overcome. Setting the jobs report aside, let’s talk about the inflation we’re measuring in the economy. What do we need to know about the figures we’re reading?

Rob: The bottom line is a one-month snapshot isn’t going to tell us very much. Is a recent bump in the CPI the start of a new trend? Perhaps, but the answer is higher consumer prices are likely the result of a number of factors unrelated to monetary policy. Last year we saw widespread shutdowns in many manufacturing sectors, and that reduced output up the supply chain is now being felt as our economy begins to open up. Ultimately, this isn’t big news. It’s exactly what Jerome Powell said he was going to do: keep rates low and endure short-term inflation effects to jumpstart the economy.

Well, assuming some inflation might be our reality for a little while, what does that mean for everyone?

Well, in short—it’s reduced purchasing power. Your dollar simply won’t buy as much. But inflation isn’t felt in the economy uniformly. Someone trying to buy a used car or renovate their basement right now is going to experience price increases much more severely than those buying clothes or groceries. What does it mean for investors? The good news equity markets are usually a pretty good hedge against inflation. The worst thing you can do during a period of inflation is be sitting in cash or long duration assets. What’s important is for rate-of-return to exceed that rate of inflation. As soon it starts to outpace real growth, that’s when monetary policy needs to take action.

How does the possibility of a high-interest economic environment affect the way you manage EdgeRock portfolios?

Right now we’re closely monitoring the situation. The underlying data doesn’t suggest taking drastic action, but that doesn’t mean we shouldn’t be prepared. Our strategies overall are well-equipped to handle market inflation and we’ll always be looking for buying opportunities during these momentary dips. If the Fed does raise interest rates in the coming months to address inflationary concerns, that’s something we will adjust to as well.

Sometimes the transitory effects can leave a pretty big dent too. Where do things like hacked oil pipelines fit into the equation, and do we need to worry about these kinds of incidents having long-term impacts on prices when the economy is still in a tenuous state?

Data security is a growing concern for every business, including EdgeRock, because this kind of intrusion is likely to become more and more common. That said, it’s a temporary setback in the southeastern oil supply. Nothing the nation’s oil reserves can’t handle. Investors should know that these temporary buckles in the market due to panicked demand are not necessarily indications of inflation. I do think our clients should be extra vigilant with their credit statements. Do you have a credit monitoring service? Does your homeowners insurance policy cover data hacks? These are things we need to be mindful of in 2021.

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