Inflation Data Will Likely Force Fed to Stay Aggressive with Quantitative Tightening Plans

Last Friday the U.S. Bureau of Labor Statistics reported that the Consumer Price Index (CPI) for the month of May increased 1.0% from April, much higher than the 0.7% expected by economists. On a 12-month basis, inflation increased by 8.6%, the highest since 1981¹. The higher-than-expected May inflation reading dashed some economists’ hopes that inflation had peaked and suggests that the U.S. Fed will have to stay aggressive with quantitative tightening (i.e., Fed funds rate increases and asset sales from its balance sheet) in order to quell inflation. The more aggressive the Fed needs to be, the higher the risk of a more significant slowdown in the economy.

Both the bond and stock markets have reacted swiftly to the news. Two-and ten-year U.S. Treasury yields increased 23 and 12 basis points, respectively, on Friday with similar increases expected on Monday². And the S&P 500 fell 2.9% on Friday with a similar decline expected on Monday based on early morning trading³.

Unfortunately, heightened financial market volatility is likely to continue in the near-term. The Fed has only just begun on its quantitative tightening path, and we expect economic and corporate earnings releases in the coming months will likely reflect a mixture of positive and negative impacts of Fed policy and feed additional volatility. Evidence of a deceleration in inflation would help reduce volatility, but that may be months away. As such, and as highlighted in our recent market updates and commentaries, we continue to have a cautious view on the economy and financial markets.

We encourage you to reach out to your investment team should you have any concerns regarding the financial markets, economy, or your portfolio. An assessment of your portfolio’s asset allocation in relation to your investment objectives and planning for near-term liquidity needs are always a beneficial exercise.