Markets stick with ‘don’t fight the Fed’ mantra amid rising inflation

11:47 am Wednesday, July 14th, 2021

By Lewis Krauskopf

NEW YORK (Reuters) – Signs of inflation abound and the world’s biggest asset manager is warning higher prices may be here for a while, yet a sizable chunk of the market appears to be leaning on an age-old adage: don’t fight the Fed.

Treasury yields slid and stocks moved higher with the S&P 500 hitting a record after Federal Reserve Chair Jerome Powell, in remarks prepared for delivery at a congressional hearing on Wednesday, assured lawmakers that higher consumer prices would prove fleeting and the central bank was unlikely to unwind its easy-money policies sooner than expected.

The moves come despite Tuesday’s consumer price data showing inflation ran hot for the third straight month in June, suggesting that some investors have come around to the Fed’s view regarding the recent inflationary spike. Another report on Wednesday showed U.S. producer prices surged in June, leading to the largest annual gain in more than 10-1/2 years, while BlackRock chief Larry Fink earlier on Wednesday said inflation will likely force the Fed to change policy.

Powell is “sticking to script” that inflation is transitory, said Paul Nolte, portfolio manager at Kingsview Investment Management in Chicago.

“When you say, ‘Hey, by the way we are going to pretty much keep things as they are,’ that takes the worry of taper off the table,” Nolte said.

Fed monetary support has been a key pillar for markets since the pandemic, helping buoy the benchmark S&P 500 index to a 95% gain since March 2020. Signs of a faster-than-expected unwind, such as a tapering of its bond-buying program, could spark turbulence in asset prices.

A BofA Global Research survey of fund managers taken earlier this month found that 70% believed the spike in inflation was transitory, with 26% saying it would be longer lasting.

“Inflation has increased notably and will likely remain elevated in coming months before moderating,” Powell said, restating the U.S. central bank’s faith that current price increases, despite the concerns they are raising about unmoored inflation, are tied to the reopening of the economy and will prove fleeting.

Powell is scheduled to appear before the U.S. House of Representatives Financial Services Committee at 12 p.m. EDT

Still, some investors believe higher prices may be more sustained.

“I am not calling for 1970’s inflation but I just think we are going to have above 2% inflation .. probably closer to 3.5% to 4.0%,” Fink, chief executive of the world’s largest asset manager BlackRock Inc, said in an interview with Reuters.

“Does that mean the Federal Reserve will have to change policy? I think so.”

(Reporting by Lewis Krauskopf; Editing by Ira Iosebashvili and Andrea Ricci)