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Short Note: Don't fight the Fed

Short Note: Don't fight the Fed

JJ Atencio Patrick Wong July 16, 2021

Headlines continued to be about inflation in the last week as consumer price index(CPI) in the U.S. posted a multidecade high at 5.4% YoY instead of the 4.9% that markets were anticipating.

However, markets seemed mostly unaffected, which could be telling us that its view is becoming more and more in line with the Fed's consistent view that high inflation will be transitory.

How can that with such high CPIs? Well, it's because partipants are starting to see that only a few segments are driving inflation such as energy and secondhand car prices.

Overall, the Fed is still focused on being accommodative as it focuses on its mandate of maximizing employment. The coming months will see something close to USD5Trn in stimulus from the U.S. government(part of which was rerouted to Biden's infrastructure package), which will feed into the U.S. economy.

For now, we think equity markets will continue to be range bound, but accommodative policies from the Fed as well as continued strength in earnings could eventully grind U.S. markets higher. Inflation fears likely continue to be overblown, and the market is now beginning to see it the Fed's way, leaving less room for volatility. As they say, "Don't fight the Fed".