The facts of inflation aren’t changing, but the attitudes of central banks are.
According to Nuveen chief investment strategist Brian Nick, the United States Federal Reserve could be looking to hike rates as soon as March 2022.
Pointing to data released this week confirming that consumer prices in the US rose 7 per cent in 2021, he said the US Federal Reserve has come a long way from its “keep calm and carry on” messaging back in September 2021.
“Until last year, it would not have come as a surprise to markets that a central bank whose economy had just experienced a year of 7 per cent inflation might look to raise rates,” he said.
Mr Nick said there are two drivers for this change of heart from central banks like the Fed.
“Supply chain issues aren’t going away fast enough, and durable goods prices continue to rise when the Fed and others likely expected them to be correcting by now.”
In addition, “the unemployment rate has dropped really far, really fast and the recovery in labour force participation has been disappointing.”
On top of a looming rate rise, Mr Nick said that the Federal Reserve is also primed to begin quantitative tightening.
“QT occurs as the Fed allows maturing securities to roll off its balance sheet without replacing them, draining liquidity from the financial system and tightening overall conditions,” he explained.
Despite these impending interventions by central banks, Mr Nick said that he still doesn’t foresee a scenario where financial conditions change dramatically.
“This makes the debate between one hike and three hikes (or even four) far from life or death for the economy. It will matter, however, where and when the Fed stops hiking in 2023 or 2024.”
Touching on the economic elephant in the room, Mr Nick said that the Omicron variant remains “a wild card” for global markets.
“Countries that attempt to contain the virus via strict mitigation measures could suffer economically in the first quarter as COVID waves ripple through the globe,” he speculated.
However, Mr Nick said that he doesn’t expect this wave of the pandemic to be as inflationary as the previous ones due to the lack of fiscal stimulus.
“Omicron and concerns about policy tightening add to our conviction that 2022 will be “slower” than 2021 “… but still pretty fast and overall, that should benefit investors with diversified portfolios and risk on positioning,” he said.
