Back to All Posts

9 minutes

Key Points for the Week

  • The Federal Reserve raised its estimate for inflation and signaled it may reduce bond purchases and raise interest rates sooner than expected.
  • U.S. retail sales remain at elevated levels despite falling 1.3% last month in the face of higher prices. Clothing sales grew more rapidly than other sectors.
  • China continues to emphasize industrial companies over retail sales as industrial production rose 8.8%.

The Federal Reserve Open Market Committee (FOMC) met last week. They get together eight times a year to review current economic and financial conditions, assess risks to price stability and economic growth, and adjust monetary policy accordingly.

When the Federal Reserve raises the fed funds rate to keep inflation and economic growth in check, it is ‘hawkish’. When the Fed lowers the fed funds rate to encourage inflation and economic growth, it is ‘dovish’.

Last week, the FOMC appeared to veer toward a more hawkish policy.

The FOMC did not change current policy. However, the dot plot – a chart that reflects meeting participants’ expectations for the fed funds rate in the years ahead – showed a majority leaning toward two rate hikes in 2023. That was new. The March 2021 dot plot, which showed no rate hikes before 2024, reported Ben Levisohn, Nicholas Jasinski, and Barbara Kollmeyer of Barron’s.

Financial market suspicions that a hawkish turn might be underway were confirmed on Friday when St. Louis Federal Reserve President James Bullard, who will become a voting FOMC member next year, told Rebecca Quick of CNBC’s Squawk Box:

We were expecting a good year, a good reopening. But this is a bigger year than we were expecting, more inflation than we were expecting, and I think it’s natural that we’ve tilted a little bit more hawkish here to contain inflationary pressures.

St. Louis Federal Reserve President James Bullard

Financial markets weren’t thrilled by the news.

The increasingly hawkish tilt caused stocks that benefit from a stronger economy and hotter inflation – the financials, energy, and materials sectors among them – to get hit hard, and has sparked a resurgence in the tech trade. Growthier tech stocks again beat cyclical and value stocks on Friday…All 11 sectors of the S&P 500 finished in the red on Friday.

Barron's reported

Major United States stock indices finished the week lower, and the Treasury yield curve flattened somewhat, suggesting slower economic growth may be ahead.

This Week in the Markets

The Federal Reserve raised its inflation forecast 1.0% for this year to 3.4% and indicated inflation will stay near its target of 2.0% in coming years. Based on a more rapid recovery and higher-than-expected inflation in recent months, Fed officials estimate the Fed will raise interest rates twice in 2023. The moves also suggest the Fed will start reducing its bond-buying program this year rather than in 2022.

U.S. consumers also reacted to higher inflation, by slowing down purchases. Retail sales fell 1.35% compared to last month. Some decline is expected as the stimulus-boosted purchases of recent months will be tough to surpass. Chinese industrial production surged 8.8% over the last year as China continues to focus on industrial growth rather than a retail recovery.

Stocks struggled toward the end of the week as investors wrestled with the Fed’s communication. The S&P 500 lagged with most of the decline coming during Friday’s move lower. The MSCI ACWI also fell. Bonds inched higher as the Bloomberg BarCap Aggregate Bond Index added slightly.

This week’s reports will include updates on trade, home sales, and durable goods. The Personal Consumption Expenditures report, which includes updates on income and inflation, will also be published.

What’s the Difference?

Over the next few months, we’ll probably begin to hear more about the deficit, the debt, and the debt limit. Here’s a primer to help you keep them straight.

The U.S. deficit: When the United States has a deficit, it means the government spent more than it took in. When the government spends less than it takes in, it is called a surplus. Deficits might be helpful. For instance, when a pandemic occurs, deficit spending may help stabilize a wobbly economy.

The U.S. government engaged in deficit spending in 2020 and early 2021 to support Americans, businesses, and the economy. It spent $6.6 trillion and took in $3.4 trillion in revenue ($1.3 trillion was payroll taxes that fund Medicare and Social Security). As a result, the budget deficit was $3.1 trillion in 2020.

The national debt: Whenever the U.S. spends more than it takes in, the national debt increases. The debt is the amount the U.S. government owes. Every annual deficit adds to the debt and every annual surplus reduces it. There are a variety of ways to measure the national debt. At the end of the first quarter of 2021, the national debt was:

  • More than $28 trillion
  • 127.5 percent of gross domestic product (GDP)

So, how much debt is too much? Research suggests the answer depends on a country’s economic growth rate, the level of interest rates, and the strength of its institutions and central bank, reported Heather Hennerich of the St. Louis Federal Reserve’s Open Vault Blog.

The debt limit: When a government runs a deficit, it borrows money to keep operating. The amount that it can borrow is determined by the debt limit, a.k.a., the debt ceiling. The debt limit is the amount of money the government is authorized to borrow to meet its obligations, such as Social Security and Medicare benefits, military salaries, national debt payments, income tax refunds, and other commitments.

Since 1960, Congress has acted 78 separate times to permanently raise, temporarily extend, or revise the definition of the debt limit.

The U.S. Treasury reported

The debt ceiling was suspended in 2019, and the suspension expires on July 31, 2021.

Three Responses to Inflation

Inflation has been the topic of greatest interest to investors in recent weeks. Most market conversations with investors have included a longer than normal discussion about where inflation is headed and how high it might go. This week’s Fed meeting and economic activity detailed how the Federal Reserve, companies, and consumers are responding to concerns inflation is climbing higher.

The Federal Reserve

The Fed showed signs of grappling with the increasing inflation while wanting to reassure investors. Fed economists raised their 2021 inflation forecast from 2.4% to 3.4% as higher prices in recent months forced an upgrade to future expectations. Official Fed estimates showed they expected the jump in prices to moderate in the future. Expectations for 2022 and 2023 were only raised 0.1% and are now just above the 2.0% target.

There are signs the estimates are causing some Fed officials to reassess how quickly to adjust monetary policy. A group of 18 Fed officials, including all the regional governors, shared their estimates of where rates would be in future years. The revised projections show 13 of the 18 members expect a rate hike by the end of 2023. That number nearly doubled from estimates shared in March, before inflation started moving higher. The number expecting a hike in 2022 moved from four to seven.

Before raising rates, the Fed is more likely to slow down its purchases of bonds. The strategy, called quantitative easing, is designed to keep longer-term rates low by having the Fed purchase the debt directly from the government or government entities. Some observers expect the Fed to slow down the $120 billion in bond purchases as soon as September.


One of the causes of increased inflation has been supply shortages in key inputs, such as lumber and semiconductors. Those shortages have caused spikes in the price of housing and used vehicles, as the lack of semiconductors has slowed the production of new vehicles. The effect on prices of goods has been strong. Producer prices jumped 0.8% last month and are up 6.5% in the last year.

These price jumps have likely contributed to investors’ worries about inflation. But the Fed anticipates the supply shortages will turn and prices will fall. Lumber prices are a good example of how prices can move. Lumber futures have dropped 41% from the recent high and fallen 14 of the last 16 trading days.


Consumers are responding to higher prices by slowing down purchases. Retail sales dipped 1.3% last month as the impact from stimulus checks faded and consumers reacted to higher prices by stepping back from purchases. The stimulus checks likely pushed short-term demand higher than capacity allowed, and some slowing demand may take the pressure off prices in key areas.

Consumers are increasing purchases in areas associated with reopening. Restaurants and bars experienced additional demand. Clothing sales grew rapidly, rising 3% from last month, and are up more than 200% from last year. High vehicle prices contributed to a 3.7% decline in sales from last month, and the home improvement sector experienced a 5.9% decline from April.


Our view is the surge in inflation will likely prove temporary but that inflation will be higher than the average inflation rate for the past ten years. We expect inflation to stabilize in the 2-4% range. Improved supply in some key market segments should reign prices in, even if the decline isn’t as rapid as the plummeting lumber prices. What we find most puzzling is the market commentary on how the Fed is becoming more hawkish. Rates may go up sooner than expected, but the Fed is unlikely to take any action on interest rates for more than a year. The support the economy and stock market are receiving from low interest rates seems poised to continue.

Delays in Tax Refunds

The Taxpayer Advocate Service (TAS) has stated that it is aware that taxpayers are experiencing more refund delays this year than usual. Typically, the IRS processes electronic returns and pays refunds within 21 days of receipt. However, the high-volume of 2020 tax returns being filed daily, backlog of unprocessed 2019 paper tax returns, IRS resource issues, and technology problems are causing delays. Once a return is processed by the IRS and loaded onto the agency's systems, TAS may be able to assist with delayed refunds if taxpayers meet case acceptance criteria. TAS has a case criteria tool that can be used to determine if TAS may be able to offer assistance.

Be Aware of Text Message Scam

The IRS and Security Summit have issued a warning regarding a new text message scam which cites the availability of an economic impact payment. The goal is to have the recipient reveal bank account details. If you have any questions about this scam, please contact us.

Did you Know? This Week in History

June 22, 1944: FDR Signs G.I. Bill

On June 22, 1944, U.S. President Franklin D. Roosevelt signed the G.I. Bill, an unprecedented act of legislation designed to compensate returning members of the armed services known as G.I.s for their efforts in World War II.

As the last of its sweeping New Deal reforms, Roosevelt’s administration created the G.I. Bill, officially the Servicemen’s Readjustment Act of 1944, hoping to avoid a relapse into the Great Depression after the war ended.

By giving veterans money for tuition, living expenses, books, supplies and equipment, the G.I. Bill effectively transformed higher education in America. Before the war, college had been an option for only 10-15 percent of young Americans, and university campuses had become known as a haven for the most privileged classes. By 1947, in contrast, vets made up half of the nation’s college enrollment; three years later, nearly 500,000 Americans graduated from college, compared with 160,000 in 1939.

The G.I. Bill became one of the major forces that drove an economic expansion in America that lasted 30 years after World War II. Only 20 percent of the money set aside for unemployment compensation under the bill was given out, as most veterans found jobs or pursued higher education. Low interest home loans enabled millions of American families to move out of urban centers and buy or build homes outside the city, changing the face of the suburbs.

Over 50 years, 20 million veterans and dependents have used the education benefits and 14 million home loans have been guaranteed, for a total federal investment of $67 billion. Among the millions of Americans who have taken advantage of the bill are former Presidents George H.W. Bush and Gerald Ford, former Vice President Al Gore and entertainers Johnny Cash, Ed McMahon, Paul Newman and Clint Eastwood.

Weekly Focus

If you choose to not deal with an issue, then you give up your right of control over the issue and it will select the path of least resistance.

Susan Del Gatto, Author

The only limit to our realization of tomorrow will be our doubts of today.

Franklin D. Roosevelt, 32nd President of the United States