By William Watts
Policy mistake ahead?
That doesn’t mean inflation isn’t a concern. And rising inflation expectations, a key metric watched by central bankers, could become a problem. Boivin worries that some policy makers will be too quick and aggressive in responding to inflation increases that monetary policy is ill-equipped to address.
That would risk needlessly destroying demand when what is wanted is bottlenecks to resolve themselves and supply to come back, said the former monetary policy maker. After all, tightening monetary policy would do little to unclog port or fix shortages of semiconductors that have snarled supply chains.
Traders have pulled forward expectations for interest-rate increases and stoking fears that central banks, including the Federal Reserve, will slam on the brakes more aggressively than previously expected, risking an economic downturn.
High-profile investors, including hedge-fund titans Paul Tudor Jones and David Einhorn, have argued that Fed policy makers are inflation creators rather than inflation fighters. And Jack Dorsey, chief executive of Twitter Inc. /zigman2/quotes/203180645/composite TWTR +4.23% and Square Inc. /zigman2/quotes/205989440/composite SQ +4.49% late Friday warned that “hyperinflation” was coming to the U.S. and global economy.
Major stock-market indexes have continued to power higher after stumbling in September as stagflation fears mounted. Investors have wrestled with how to trade inflation as the economy reopens, gauging the role of equities as an inflation hedge versus fears of a rerun of the stagflation scenario.
Equities struggled to keep up with inflation between 1969 and 1982, noted Nicholas Colas, co-founder of DataTrek Research, earlier this year, posting a compounded annual growth rate of negative 0.8% as the economy and the labor market were rocked by rising prices.
The S&P 500 /zigman2/quotes/210599714/realtime SPX +2.43% and Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +1.65% both ended at records on Monday, with the S&P 500 up more than 21% so far in 2021 and the blue-chip gauge up nearly 17%.
Not ‘automatically’ bad for equities
So how long will inflation pressures persist? Anyone making projections should do so with a large sense of humility given the largely unprecedented nature of the post-pandemic restart, Boivin prefaced, saying it would be reasonable to expect high inflation to persist through the first half and perhaps into the second half of 2022.
It’s more important, he said, to recognize the “nature” of the current inflation rise than the time frame. Inflation is likely to remain well above target in 2022 and will remain above target, on average, over the next five years, Boivin said.
For investors, that’s not a bond-friendly environment, he said, with the BlackRock Investment Institute favoring inflation-protected securities over nominal bonds. It’s not an environment that’s “automatically” bad for equities or other risk assets however, “which leaves us net-net underweight government bonds but overweight global equities” as investors see some inflation with a muted policy response.