Feeding without fear of inflation should invest investors

Last week, Fed Chairman Jerome Powell reaffirmed the final two steps: looking at where inflation is, rather than worrying about where it is expected to be, and making it clear that the rest will not be angry. the current on the stock market or the recent run in bond yields is worrying.

The move should reassess the main market statement. So far, it is assumed that the Fed will accept some short-term inflation that created a $ 1.9 trillion stimulus from President Joe Biden, but in the long run the Fed will reaffirm control or inflation will go away by itself.

In the affiliate market, this version of the story is reflected in higher inflation expectations for the next five years – a flat rate of 2.51%, although on average coming in above the Fed’s preferred inflation rate. For the next five years, inflation is expected to be much lower, just 2.11% on Friday; if correct, it would certainly mean that the Fed ‘s preferred inflation rate would be below its 2% target.

Another statement is far more political, and has been very popular with investors looking at economic history. It begins with the transformation of the deficit debate. After Obama’s impetus in 2009 even Democrats were worried about how it would be paid, and the parallel was popular with troubled states like Greece.

This time around the main concern of Democrats, as it stands, is that overspending may encourage inflation.

Yes, Republicans have gained fiscal integrity since losing the White House, and the majority of Democrats could not be more vulnerable. But in the last decade almost everyone has come to understand the main idea of ​​today’s money theory, that a dollar publisher is not going wrong.

Here the story moves to the Fed. Hawkish feeding can challenge a White House that suffers heavily with walking rates. But Mr Powell has vowed not to walk until inflation is stable at the Fed’s target and the country is in full swing. Most policymakers believe that means at least another three years of near-zero levels.

The question is what happens if the target is reached earlier. If inflation rises sharply, say to 3%, will the Fed be willing to raise rates early and risk rising unemployment? What about 4%?

Policymakers have emphasized that reaching full employment helps marginalize society the most. The flip side is that pushing up unemployment to curb inflation of that group is the biggest. Politically that makes tighter monetary policy harder to determine.

Wider issues are also pushing towards higher inflation, says Pascal Blanqué, chief investment officer of French asset manager Amundi Asset Management. Rising national conflict, as well as export restrictions on protective equipment and vaccines, are pushing companies and governments toward secure domestic supply chains, even at higher costs.

A parallel global recovery this year will mean upward pressure on commodity prices, the classic source of inflation. And Covid-related unrest has led to widespread production problems, including a shortage of carrier vessels and essential parts for cars, which again marks higher prices.

“There is a continuing shift from a statement of secular stagnation to what I call the way back to the 1970s,” Mr Blanqué says.

I think it is safe to leave the flower bells in the closet. True inflation remains highly unlikely, although it is now more likely than it used to be. The job market is much more flexible than it was in the 1970s, making wage price spikes difficult, while there is still enough international competition to limit the ability of companies to raise prices. These trends may reverse, but it will take years for unions to redirect their power and economies to domestic production.

However, everything is in place for at least some market concern about inflation.

Inflation is expected to jump higher in the coming months due to a sharp drop in prices a year ago, as Mr Powell himself said on Wednesday. He said the Fed would avoid what it intended to be just a blip. The economy also appears to be growing rapidly; Fed’s Nowcast’s Newcast model, for example, forecasts annual growth of 6.3% in the first quarter.

Combine that with a commitment to low rates and a president moving on to his next spending plan, and it makes sense that people would worry more about rising prices.

“Investors expect the fear of inflation,” said Dario Perkins, an economist at TS Lombard strategists, even though he thinks it is unlikely to survive.

The bets are obvious for profit from the fear of inflation against what worked last year: Treasurys dump, high-end bond dump, dump growth stocks, buy economy-conscious cheap cycling stocks, buy commodities, buy bonds waste.

The market as a whole could rise or fall, according to MPs, as last Thursday showed: The S&P 500 was slowed by a sharp fall in growth stock, even as it suffered. fewer cheap and rotating members as banks rise. In Europe, the same pattern led to an increase in the market, as cheap and volatile stocks make up a larger segment.

Much of this has already happened, as the same trades benefit from economic reopening. So the fear must be great to get over what is already expected in the price.

However, it is clear that a permanent system move is not priced to Treasurys. Even after last week’s jump, the 10-year high is still around 1.7%, and long-term bond market inflation expectations have remained stable. Investors, for the most part, accept Mr Powell’s pitch, believing that after a short period of higher price rises, the Fed will be willing to prove its independence and inflation kept in line.

If the market loses confidence, the long-term yield of the Treasury should ramp up even faster, the dollar would slip and the stocks that are most dependent on long-term profits in the future, Tesla thought, would hit them hard.

Fear of hyperinflation will hurt.

Write to James Mackintosh at [email protected]