As we know, Congress tasked the Federal Reserve with a dual mandate: full employment and price stability - which means the central bank should foster an economic environment where everyone who wants a job has a job and inflation remains constrained - which, for the Fed, is a general increase in prices of 2% year on year long-term. Coming through and out of the pandemic, the Fed emphasized the employment aspect of its mandate, wanting to mitigate the economic damage done by the pandemic and see the US economy come back to and exceed its pre-pandemic peak (and it succeeded as the unemployment rate is back below 4% and GDP is larger than ever). The inflation aspect of the mandate, if not dismissed, was downplayed through 2021 as the bank was confident the spike in prices for goods and services that began manifesting in 2021 would prove transitory.


In hindsight, the Fed did not pivot to the changing and increasing inflation dynamic soon enough and is now focused intensely on tamping down historically high inflation, which means raising the Fed Funds Rate and shrinking the bank’s balance sheet. Jawboning is another powerful tool in the Fed’s toolbox, and Chairman Jay Powell has been adamant that the hawkish policy stance will persist until the Fed sees “clear and convincing evidence that inflation pressures are abating.”



What is interesting about the Fed and its inflation fight is while the Fed has only begun moving the needle on tightening monetary policy, markets seem to have begun pricing in a more benign inflation environment, at least as evidenced by the drop in the US 10 Year Yield from 3.13% to 2.74% and the drop in inflation expectations over the five-year period that begins five years out from 2.67% to 2.28% (see chart). If, and it is a BIG IF, the market believes the Fed will succeed in its battle to tame inflation, yields and inflation expectations should stabilize, and maybe come in further; either outcome should prove very positive for the economy, investor sentiment, and risk assets.


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The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital Investments, LLC, a registered investment advisor. 0943-BCI-5/31/2022