US inflation surged above market forecasts in April 2021. Headline inflation rose 4.2 percent YoY, its highest level since September 2008. Meanwhile, core inflation reached 3.0 percent YoY. Such increases were driven by improving domestic demand following accelerated vaccination efforts and continuous issuance of stimulus packages. On the other hand, supplies were threatened by shortages of goods and raw materials for manufacturing amid a supply chain bottleneck and rising commodity prices, especially fuel prices, which has led to the spike in inflation.
Amid rising inflation, Fed may be compelled to implement QE tapering sooner than anticipated. Nonetheless, the Fed will still focus more on economic recovery than inflationary pressures. While the labor market has recently begun to recover, unemployment numbers continue to be higher than pre-pandemic levels. The US unemployment rate stood at 6.1 percent in April 2021, significantly lower than the peak of 14.8 percent in April 2020. However, it remains considerably higher than the 3.5 percent of the pre-COVID-19 era. That said, the number of unemployed people in April 2021 averaged 9.8 million, around 4 million higher than the pre-pandemic level. Therefore, the labor market may require a longer-than-expected period to reach the Fed's target for full economic recovery.
The Fed will likely have to maintain relaxed monetary policy until at least year-end 2021. However, due to rising inflation, the market sees a chance that the Fed may implement QE tapering sooner than forecasted. Such action would drive up the 10-year US Treasury yields, which could lead to the Fed's intervention in the bond market. The possibility exists that the Fed may resort to yield curve control in the near future in order to keep long-term bond yields from growing too rapidly. Even if the Fed can decrease medium- and long-term bond yields, it would still need to reverse its quantitative easing policy in the end once the US labor market nears full employment. This time around, the Fed's intervention may be short-lived, lasting only a few months, a stark contrast to 2011-2012 when the Fed conducted “Operation Twist", which lasted for years.