When the Music Stops: Positioning for High Inflation and Policy Normalization
- By Alberto Gallo
- 8 min read
Loose monetary policy and negative real rates boosted financial markets over the past decade. Until the Covid-19 crisis, however, monetary easing acted alone. Low rates and quantitative easing failed to boost growth and inflation. With the pandemic, fiscal and monetary stimulus are acting together, and central bankers must finally deal with the consequences of their actions: inflation.
The Fed, the ECB and BoE are behind the curve. Normally, a tightening cycle would start during rising growth momentum. This time, however, central banks are likely to tighten as fiscal stimulus fades.
Markets are currently pricing four Fed hikes this year, but we believe more might be needed to tame inflation, as geopolitical risks and energy prices continue to rise. This means the Fed might have to hike faster, suddenly slamming on the brakes – at the risk of throwing some investors through the windshield.
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