Currently the Fed is thinking that the higher inflationary rate over the past month is due to bottlenecks and other temporary economy issues that will work themselves out as we head into 2022. This would imply that lower than average inflation or even deflation could be expected towards the end of the year to offset the higher rates we're seeing today. Should we not see any inflation correction over the next 3-6 months, we'll likely see quick movement by the Fed to increase interest rates from their record low levels from the last few months as the Fed tries to douse inflationary fires.
The impact of higher interest rates is generally to lower asset values. The fear from the Fed is that if they increase rates in the next couple of months and the inflationary fears end up being temporary, they run the risk of lowering values unnecessarily and pushing the economy back into a recessionary space. We'll see what happens!
Policy makers are watching May’s reading to gauge the magnitude of what many expect to be several months of stronger inflation after a year of very weak price pressures during the worst of the pandemic. Whether the pickup in inflation proves temporary is a key question for the U.S. economy and financial markets as the Biden administration, Congress and the Federal Reserve continue to support the economy with fiscal and monetary policy measures. The Fed expects the inflation rate to rise temporarily this year. A sustained, large increase in inflation could compel the central bank to tighten its easy-money policies earlier than it had planned, or to react more aggressively later, to achieve its 2% average inflation goal.