With Federal Reserve monetary policy expected to be on hold for the next 18-24 months, look for the 2-year U.S. Treasury yield to remain below 0.40% for 2021 with the potential for the top of the trading range to increase to 0.50% during 2022. The current yield is near the top of the six-month trading range of 0.11%-0.18%. As fiscal and monetary stimulus eclipse all previous policy efforts, the range for the 10-year Treasury yield is much wider at 0.65%-1.75%. Look for the 10-year trading range to trend higher with the upper bound potentially breaking above 2% later this year on the prospect for stronger economic growth and higher inflation.

Gross Domestic Product: The third estimate revised the Q4-2020 GDP higher by an increase in inventories late in the quarter, while consumption growth was a touch slower. Manufacturing and housing continued to lead the recovery. However, it may be difficult for these two sectors to sustain the rate of growth, which means it will be critical for consumer spending to accelerate in the coming months. Net exports and government spending were a modest drag. Overall, the report suggests solid growth for the medium-term with risks to the economy being modest as the government remains committed to more fiscal stimulus.

With $2.8 trillion in fiscal spending already in the pipeline look for Q1-2021 GDP to be around 5% and nearly 10% for Q2-2021. The Biden Administration is expected to propose $2-3 trillion in additional spending focused on infrastructure, climate change and support for social programs. Provided the additional spending is passed by Congress later this year, look for 2022 to experience 4%-6% economic growth. Experts are also expecting President Biden to approve the largest tax increase in decades, which will likely include increases in corporate and personal taxes, and new social taxes. Growth in 2023 may slow as fiscal policy tailwinds start to fade and headwinds form.

Consumer Price Index: Consumer inflation for February rose by 0.4% month-over-month while core consumer price inflation increased 0.1%. There was a modest increase in food prices, up 0.2% while gas prices continued to climb, up 6.4%. Compared to a year ago, overall inflation is up 1.7% with food prices up 3.6% and gas prices up 1.5%. Core inflation, which excludes food and gas components, is higher by 1.3%. Housing and other costs have yet to register much of an increase with the services subindex up 1.3% year-over-year. While there have been pockets of inflation related to shifting demand during the pandemic, the trend shown in the chart below indicates inflation has been limited.

Look for inflation to gradually trend higher as low readings from the start of the pandemic fall out of the year-over-year average calculation and fiscal spending spurs economic demand and growth.

U.S. employment improved as nonfarm payrolls for March expanded by 916,000. The unemployment rate fell 0.2% to 6% as household employment expanded more than the labor force. Year-over-year (yoy) average hourly earnings remain strong but will likely trend lower as more states ease COVID-19 mitigation restrictions and leisure and hospitality workers return to work. Look for the jobless rate to gradually improve in 2021, potentially trending down to 5.2% by year-end.

At the conclusion of the March 17th Federal Open Market Committee meeting, policymakers decided to keep the target range for the federal funds rate at 0.0%-0.25%. Monetary policy rates are expected to be relatively unchanged for the next 18-24 months as the Fed operates under its new “flexible average inflation targeting” (FAIT) regime. The Fed’s dual policy mandate of stable prices and maximum sustainable employment will remain the focus for policymakers. The Fed lifted its forecasts for growth and inflation and lowered the projections for unemployment. The market was intrigued with the “dot plot” graph, which showed several committee members moved up their timing for the first increase in policy rates, which Fed Chair Jerome Powell subsequently downplayed indicating the dots were forecasts only. Chair Powell continued to signal that monetary policy would remain accommodative until inflation is consistently above 2%.