Good morning,

The federal reserve released its latest update on the condition of the US economy last night.  It was an extremely hawkish affair,  with a sped up timeline for interest rate hikes,  due to expectations that inflation will increase in 2021.  The Federal Open Market Committee kept its benchmark rates close to zero,  however on their dot plot,  they have signalled two potential rate hikes in 2023,  which Fed Chair Jerome Powell has signalled should not be read into too much,  despite this causing a stock slide.

Tapering off bond purchases was discussed,  and much like the rest of the conference,  Powell preferred ambiguity,  saying that no decision had been made and that they are monitoring economic data.  To highlight how early it is to read into this announcement,  Powell said “you can think of this meeting that we had as the ‘talking about talking about’ meeting,  if you’d like.”  There was also a revision in unemployment for next year,  which was previously forecast at 3.9%, however subsequently revised down to 3.8%, to reaffirm signs of a recovery.  The underlaying tone to the meeting,  justifiably,  is that these factors are largely transitory,  and rely on what happens with Covid.

Staying with inflation:  Rishi Sunak has got an interesting predicament ahead of him,  with the inflation component of the ‘triple lock’ on pensions meaning that he might have to spend an extra £4bn a year on state pensions from next April.  The rules say that pensions should increase by the higher of either average earnings growth,  inflation,  or 2.5%.  Average UK earnings could rise by as much as 8% by July as the effect of people being on furlough starts to unwind and the national average wage rise jumps to reflect that move.  This puts the Chancellor between a rock and a hard place,  because he won’t want to spend that much,  particularly when other areas of public spending won’t be seeing increases for a few years to come but disenfranchising your voter base to save a few (billion) quid will also be a bitter pill to swallow. The FT has the story, and a suggestion that a way out of this might be to increase the timescale over which the average wage growth is calculated,  which would smooth out this unpalatable spike.

The government may be dangling a holiday carrot by contemplating allowing those with both jabs to travel to amber countries without having to quarantine on their return.  The news comes from The Telegraph who have quoted a ‘senior source’ as saying “they haven’t definitely got there yet, but that’s the direction of travel” – which is by no means definitive,  but should give people some hope that there could be a very quick return to international travel after the July re-opening date,  when it is expected that everyone over 40 will be double jabbed and everyone over 18 will have had one dose – though there are supply constraints on the Pfizer and Moderna vaccines,  which is going to make the latter a little trickier.

This morning we have seen continued USD strengthen,  and the forecast from Bloomberg analysts is that the greenback is about to go through a period of sustained strength.  It is clear that the US is entering a period of high inflation,  which has jumped 5% in the 12 months to the end of May,  which is the largest year on year increase since August 2008.  Despite Powell’s comments,  if left unabated,  inflation would require interest rate hikes well before 2023,  ultimately,  we have received a far more upbeat tone on the recovery.

Have a great day


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