Powell Thinks Inflation Won’t Last, Sending Rates Lower

Rates decline following Fed Chair Jerome Powell’s testimony

Treasury yields/swap rates closed 1-4 bps lower after Powell reassured markets current elevated levels of inflation are transitory – the 10-year UST yield ended the day almost 3 bps lower at 1.46%.  US equity indices closed in the green – the S&P 500 and DJIA rose 0.5% and 0.2%, respectively, while the Nasdaq increased 0.8% to a new record.

Powell believes inflation will begin to normalize soon

In his testimony before the House Select Subcommittee, Powell provided his thoughts on the economic recovery, commenting, “Indicators of economic activity and employment have continued to strengthen, and real GDP this year appears to be on track to post its fastest rate of increase in decades. Much of this rapid growth reflects the continued bounce back in activity from depressed levels.”  Due to the accelerated growth and accommodative policy, he acknowledged inflation had increased “notably.”  Powell continues to view this “transitory,” though he draws the line at 5% inflation, describing it as “not acceptable.”  Despite all the progress, he thinks the recovery still has a “long way to go.”

San Francisco Fed President Mary Daly thinks Fed could begin tapering process this year

Though the Fed remains steadfast in their outcomes-based approach, Daly commented, “I am bullish on the recovery,” believing the bank’s taper threshold could be met later this year or early next.  Daly’s comments were in line with Chair Powell’s regarding the current economic outlook, adding that the bank should begin discussions around tapering.  She anticipates data over the next few months will be volatile and will “look to the fall to get some more clarity about the future path of the economy.”

Existing home sales fall to an annual rate of 5.8 million in May

According to the National Association of Realtors, sales of existing homes decreased by 0.9% in May due to the continued low supply of homes.  Despite four consecutive months of decline, sales are up 44.6% from last year.  Realtors chief economist Lawrence Yun commented, “Lack of inventory continues to be the overwhelming factor holding back home sales, but falling affordability is simply squeezing some first-time buyers out of the market.”  Only 1.23 million homes were on the market last month, a 20.6% annual decline, while the median home price was up 23.6% from last May, the fastest acceleration on record.