The US Federal Reserve has dismissed any concerns that the market might have had about monetary tightening. The central bank said it will continue to keep interest rates low, and it will keep buying bonds until the US has achieved maximum employment and inflation has reached 2%.
It has already bought about $4 trillion worth of bonds and could buy carry on buying around $120 billion of those fixed-rate instruments a month. That is a serious arsenal of ammunition at the Fed’s disposal.
So, it looks, for the moment, at least, that the Fed has won the argument with bond investors. For a brief moment, fixed-income investors have been stamping their feet in annoyance. They have been demanding more interest for holding those US Treasuries.
They can demand all they want – interest rates aren’t going to rise until the Fed is ready to move. It said “it is not time yet” to talk about any change in monetary policy and the bond-buying programme.
But here’s the rub. The US economy will continue to run hot for a while. In the first three months of 2021, it grew by an annualised rate of 6.4%, following an expansion of 4.3% in the previous quarter. That is great news.
Growth had been powered by American consumers, as more people have started returning to work. So, as consumer unleash their pent-up demand, household spending is likely to accelerate. American household spending accounts for around two-thirds of the economy.
It is, therefore, understandable why bond investors are worried. Unfettered consumer spending can drive up prices, especially when supply is unable to keep up. Some US companies have already indicated that they either have or will be raising prices.
Kimberly Clark (NYSE: KMB) has already increased the price of its Kleenex tissues. Similarly, Procter & Gamble (NYSE: PG) said it has started raising prices on some of its products. Elsewhere, Coca-Cola (NYSE: KO) said it would raise prices to offset higher commodity prices. Colgate-Palmolive (NYSE: CL) said overall pricing increases had boosted revenue.
So, it will cost us more to blow our noses, quench our thirst, brush our teeth, and wash our clothes. That might just be the start. Of course, we have a choice. We could, if we choose, not blow our noses, not drink Coke, not brush our teeth and not wash our clothes.
Alternatively, we could invest our money in inflation-beating assets. I would sooner do that than walk around with yellow teeth and in clothes that smell.
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David does not own shares in any of the companies mentioned.