Market Overview

The large increase in fiscal and monetary stimulus that has been observed in this crisis has raised concerns about the risk of inflation. In essence, the argument focuses on the fact that if the money supply increases faster than its actual production then (ceteris paribus), inflation will occur. That is, if a central bank prints currency, at the outset households will also have more money available, which will perhaps make them spend more on consumption. Despite an increase in the money in circulation - the amount of goods does not change - therefore leading to an increase in prices.

The reality is that since the great financial crisis of 2008 that has never printed so much money and yet inflation is late to arrive. Irving Fisher's quantitative theory of money helps you understand why:

MV = PT

where M refers to the amount of money existing, V to the speed of money (the number of times that money exchanges hands) and P and T in terms of prices and total amount of goods, respectively. What several economists point out is that as the money supply has extended (M), the speed of money has decreased as well as the total amount of goods increased - so the equality of the equation continues to continue relatively low product prices (P).

Federal Reserve and Inflation Expectations

US Treasury Secretary Janet Yellen acknowledged that inflation is a risk to consider, but said she spent many years studying it and that there are the tools needed to deal with a possible rise. Deep down, what Yellen meant is always much harder to get inflation to rise than to cause it to go down. Monetary policy is always limited by its zero-lower bound limit while there is no upper limit on its performance and key interest rate decision.

The change in the Federal Reserve's monetary policy strategy also demonstrates some relaxation from the inflation target and helps predict that a new central bank action could take longer than originally anticipated. The shift from the target of 2.0% inflation to an average of 2% is a consequence of a higher focus on the labor market where a possible inflation of 3% will not cause the Fed to lose sleep. Federal Reserve Chairman Jerome Powell said that "the full realization of the benefits of a strong labor market will have continued support, both from short-term policy and long-term investments, so that all job seekers have the skills and opportunities to contribute and share the benefits of prosperity. " Although the unemployment rate has declined, a large number of people have left the labor market, making unemployment much lower than it actually is. Powell notes that "the unemployment rate of 6.3% dramatically underestimates the true nature of the problem where the real rate may be closer to 10%."

He also said he wants to avoid past mistakes when, during the recovery, if inflation accelerated, the Fed would raise interest rates, thereby stifling growth. He said that this time the Fed will be averse to a rapid rise and that it will allow inflation to exceed the target for an extended period. The goal is, once again, to reach the level of full employment.

It is really important to understand that an economy that is far from its potential and a level of full employment is unlikely to create sustainable inflation and that can last in time. While the so-called breakeven rate - which access investors' expectations of inflation - has increased, it remains historically low. In addition, real (inflation-adjusted) yields on Treasury bonds remain negative, suggesting that investors are not concerned that government loans will end private sector access to credit. The yield on 10-year Treasury bonds is at its highest level in about a year, mainly due to slightly higher inflation expectations. However, we can conclude that investors expect higher inflation, but not nearly ruinous.

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