Investor questions for the Fed: rebound, inflation and yields

New York (Mar 15)  A surge in bond yields, fears about rising inflation and a jump-forward in interest rate expectations will be top of mind for investors at this week’s Federal Reserve policy meeting.

The policy-setting Federal Open Market Committee (FOMC) led by Chair Jerome Powell convenes on March 16-17, with a policy statement and fresh economic projections due to be released at the end of the meeting.

Investors will be looking for signs of whether the U.S. central bank’s outlook for the economy has changed due to the ongoing COVID-19 vaccination program and other developments.

Here are some questions investors may have:

How worried is the Fed about inflation?

The recent passage of President Joe Biden’s $1.9 trillion coronavirus relief package has some investors worried that America’s expansionary fiscal policy will stoke inflation.

Though recent inflation data showed that core consumer prices haven’t moved significantly in recent months, inflation expectations have risen. The five-year, five-year forward breakeven inflation rate, which tracks the expected rate of inflation over five years in five years’ time, was recently at 2.1%, above the Fed’s target rate of 2%.

But a new framework adopted by the central bank last year means it will allow inflation to rise above its target for a period in order for inflation to average 2% over time. And many economists, including Powell, do not expect the strength in inflation will persist beyond the so-called base effects.

Reuters