The basic concept is the demand-supply chain in economics. However, much larger blame could be attributed to COVID and associated actions, the Rusian Invasion of Ukraine as well as the Fed Reserve misreading the inflation as transitional.Ĭonclusion- Way Forward for United States Economy Some responsibility goes to Biden for uncontrolled spending in 2021. The approximate source of inflation as outlined above is a combination of the Federal Reserve printing money in response to COVID, the disruption of supply chains on account of COVID, a sudden resurgence in Global demand post-COVID, and continued expansion of the Federal Budget Deficit. The economy has formally entered into recession and inflation is at historic high levels, and it seems that a peak will be formed in November. Whether Joe Biden likes it or not, Democrats are headed into the election with a slowing economy and high inflation. Mid-term elections in November: Mid-term elections are scheduled in the United States in November this year.The market is likely to remain volatile till the inflation fears subside and bond yields reverse back to historic levels. The main reason being a high bond yield moves money from the share market to the bond market as it is considered a safer investment. All indices like Nasdaq, S&P 500, and Dow Jones have fallen more than 30% in the last six months and are in bear territory. Bear Sentiments in Stock Market: Hike in bond yield directly impacts, high inflation, and uncertainty on the global political front has led to the stock market falling significantly in the last six months.Corporate bond yields have also risen due to inflationary pressure, with AAA bonds yielding 4.2% and BBB bonds 5.3%. The rise in long-term bond yield will also push mortgage rates and the 30-year fixed rates loans rate should be around 6.0% from 5.4% and the 15-year loans rate will rise from 4.75% to 5.25%. Analysts expect that 10-year treasury yields to peak at 3.5% within this year. Spike in Treasury bond yield: Long-term rates are not affected directly when the Fed raises short-term rates, but the inflationary environment does keep them high.

The Fed will look to sell Treasury bonds rather than just letting maturing bonds The Fed plans to reduce the portfolio of $9 trillion in assets by $47.5 billion per month in June, July, and August and then increase it to $95 billion per month after that. Quantitative Tightening: The Fed will also sell Treasury and other mortgage-backed securities in order to suck the liquidity out of the market.That would bring the interest rate to 3.25% by end of the year and 3.75% early next year. Following that, a half basis point hike is expected in the September meeting and then four more quarter-point increases in the next four meetings. There is likely to be another three-quarter rate hike at the Fed’s next meeting scheduled on July 27th. In the last meeting, the Federal Reserve increased the interest rates by three-quarters of a percentage point, its largest hike since 1994. The Fed takes measures to control inflation, by increasing short-term interest rates and through policies of quantitative tightening. Increase in short-term interest rates: Inflation is never one-dimensional and very high or low inflation affects each sector of the economy differently.Inflation Forecast 2022: Impact of High Inflation on the US Economy Overall, we expect Consumer Inflation to come in between 8.5% and 8.9% Services had risen by about 5-6% in June and are likely to rise at the same pace. Gas Prices rose 61% year on year in June (EIA), and in July Gas prices have risen 45%.

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Factset: FactSet Research Systems Inc.2019. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes.

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