Investors are always focused on the prospects for rising inflation. Since the
first of the year, the yield on the 10 - year Benchmark U.S. Treasury Bond
has risen from a yield of .913% to 1.721% as the economy added 916,000
new jobs in March. The institute for Supply Management’s index of factory
activity has risen to a near 40-year high. Manufacturers are warning that
supply-chain bottlenecks, increasing raw material costs and higher labor
expenses are beginning to add up. The $1.9 trillion Covid-19 stimulus bill
and a proposed $2.3 trillion infrastructure bill should give an added push to
an already strengthening economy.
These issues have raised inflation concerns. Jerome Powell, Chairman of
the Federal Reserve and Janet Yellen, Secretary of the Treasury, have stated
that these events are transitory. They have said that longer term inflation
should not be a concern and their intention is to keep short term interest
rates near zero. Are they right?
There are offsetting factors to the inflation and interest rate concerns.
While the U. S. economy is strengthening, other world economies, including
Europe and Japan, remain in recession. Foreign governments have forced
interest rates lower, in some cases to negative levels to stimulate recovery.
Therefore U.S. interest rates should be very attractive to foreign investors
with funds flowing to U.S. Treasury securities, perhaps keeping interest
rates here from rising significantly.
Only time will tell whether inflation will become a serious issue for our
economy and the markets. However, the risk is apparent and likely will
add to market volatility. We will remain watchful, keep fixed income
maturities short and portfolios balanced.
As always, I welcome your comments, questions and suggestions.