Of Mutual Interest: Reacting to rising inflation and rates

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NEW YORK — Investors are fearfully watching for signs that inflation is picking up. Stocks tumbled in February when Wall Street thought a big increase was coming, and since then, stocks have rallied when the market received signs that inflation was in check.

Most experts agree that inflation is going to speed up eventually as the economy expands, and that the Federal Reserve will keep raising interest rates in order to keep inflation pressures from getting out of control.

While it’s not clear exactly when greater inflation will arrive, Steve Wood, chief market strategist for Russell Investments, says it’s not too soon to prepare. Also, Wood says investors need to pay attention to a global disconnect in interest rate policy.

Even as the Federal Reserve, under Chairman Jerome Powell, raises borrowing costs in the U.S. to stave off inflation, central banks in Europe and Japan are still keeping interest rates low and buying bonds in order to stimulate their own economies.

Answers have been edited for length and clarity.

Q: What trajectory do you expect for inflation?

A: The goal is to figure out where inflation is going within the context of Fed policy. The underlying data is that inflation is increasing toward the Fed’s target of 2 per cent. The improvement in inflation is going to give the Fed confidence that it can remove much of the emergency accommodation it afforded following the global financial crisis. One ignores the Fed and Fed policy at one’s own peril.

Since February, the market is beginning to process the policy positions of a Powell Fed, which is looking at an improving economy, improved labour markets, and inflation that they feel is on target. As we all know, it’s not inflation, it’s inflation expectations which are important, and the Fed wants an environment where inflation expectations are anchored at that 2 per cent range.

Q: What kind of adjustments are you making as you see signs inflation is on the rise?

A: To many the most obvious would be the impact of rising rates in fixed-income, and over a shorter time environment that’s true. In a rising rate environment, the price of fixed income assets (like bonds) drops.

There are also implications in asset classes with an equities base. Also there are implications in terms of the economic cycle. It’s global, too. (Central banks) are using similar policy tools, but they’re not using them at the same time. That creates cross currents, and …read more

Source:: Nationalpost

      

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