A couple of analysts have just come out with predictions that we’re entering an above-expectation period of monetary tightening, especially by the US Federal Reserve.
BNP Paribas Asset Management forecasts continuing Inflationary pressures, including higher wage costs as well as sustained supply-side disruptions, reflected already in higher service as well as goods prices. It says the Fed may might raise rates at every one of its upcoming policy meetings this year.
Meanwhile, strategist Russell Silberston at investment manager Ninety One points out that market consensus expects a maximum Fed rate rise of around 1.75%, working off assumptions based on the central bank’s actions in the decade after the global financial crisis.
Silberston believes that the Fed has put mechanisms in place to reduce its balance sheet and sell assets into the financial system without triggering the liquidity shortages that forced it to ease its tightening the last time it undertook this exercise. If this is so, and interest rates have room to rise further than expected, “bond yields have much further to rise (and bond prices to fall) than hitherto”, he says.
As for Europe, ING notes that the European Central Bank has gone through “an enormous change” within six months, from calling the inflationary trend “temporary” to firm warnings on inflationary pressures. That said, the ECB has stressed how it will run down its easing programme in an orderly fashion prior to any rate rise. But the pressure is there, however ready or unready the ECB is to act on it.
And how high could the Fed rate go? BNP Asset Management estimates up to 2.5% by end- 2023. That figure happens to coincide with the Fed’s December 2018 overnight rate, highlighted by Silberston as the high point of its last tightening cycle. Could it go higher? I guess that depends on continuing inflationary pressures.
With labour shortages as one of the chief constraints on growth right now, there are obviously not going to be breadlines. Stagflation looks the unlikeliest of risks, with both US households and companies relatively well off, thanks to post-Covid-19 government stimulus and the US economy growing well.
This should feel very different from previous inflationary periods. People might even start investing in things like, well, bonds again.