Central Banks left interest rates and bond purchasing stimulus programs in place for the foreseeable future on estimations that inflation increases will level off, economic growth will continue to rebound, and unemployment will continue to decrease.
U.S. GDP expanded in the second quarter at an annual rate of 6.5%, below expectations of 8.4%, largely due to inventory shortages in the supply chain; however, the US economy is now larger than it was before the pandemic. The service sector grew for the 13th straight month.
The Federal Reserve narrative changed to a more hawkish tone regarding short-term interest rates as Chairman Powell said they may need to increase interest rates sooner than originally expected. This is likely to start with the Fed tapering its bond purchasing program.
Higher GDP growth rates and inflation tendencies also prompted other Central Banks to take more aggressive positions on combating inflation, including Canada, New Zealand, Brazil, Mexico, Norway, and Russia.
The result of a more hawkish outlook is a stronger U.S. Dollar (and other currencies) compared to the Euro, as the European Central Bank (ECB) continued to take a more dovish outlook on raising interest rates, as the vaccination and reopening process has accelerated less rapidly in Europe than in the U.S..
The Consumer Price Index (CPI) increased 5 percent in U.S. from May 2020 to May 2021. It was the biggest jump in nearly 13 years, as the economy rebounded from Covid-19. But there are reasons to expect inflation rates to level off after the immediate recovery rebound including a persistent global savings glut; aging populations; and advances in technology which are all expected to temper long-term inflation.