RE: Hawks and doves play chicken on central bank decisions26 Jan 2022 11:31
FT article part 2:
Some fund managers remain confident that fiscal and monetary authorities can work their way out of this quandary without further disrupting economic growth or markets. Nonetheless, the past decade shows how tricky this process can be. In 2013, then Fed chair Ben Bernanke sparked what became known as a “taper tantrum”, when he declared an intention to trim regular asset purchases introduced after the global financial crisis of 2008. Emerging markets currencies and bonds, in particular, suffered a heavy blow. On a smaller scale, in late 2018, current chair Jay Powell suggested that the Fed was on “automatic pilot” towards regular rate rises, triggering tremors across global stocks. Within six weeks, he had changed his tune, urging greater patience. Investors took this as, at least in part, a capitulation to market pressures. The same tension is present now. Raising rates too late or too timidly could prove to be an act of self-sabotage that leaves future generations struggling to rein in inflation and stores up other problems for the long term. “For inflation not to become a problem, we need a steep tightening cycle,” says Luigi Speranza, chief global economist at French bank BNP Paribas. He thinks the Fed may have to raise rates faster than investors anticipate. But acting too soon or aggressively threatens to strangle a global economic recovery that is already vulnerable to the vagaries of the pandemic, and to spark a short-term market shock. “The bear argument is that, if we were to get a distinct rise in [benchmark bond yields], then everything from house prices to growth stocks goes down,” says Andrew Pease, global head of investment strategy at Russell Investments. Already, double-digit percentage declines in the value of some high-growth but low-profit US technology stocks highlight how hard these fears can bite. If policymakers repeatedly tighten liquidity and then hit pause, that would line up a year of “buying the dip” in markets, Pease says — already a familiar pattern, particularly since the pandemic struck. Sliding interest rates and resilient demand for government bonds have meant that yields have declined for the past four decades, boosting the attractiveness of riskier assets. Without a continued downdraft in bond yields, to which many fund managers have grown accustomed over their entire careers, those riskier assets may struggle. Pease thinks a further decline in yields is hard to imagine, “unless you can see a world where the Fed takes rates to ECB levels, below zero”. “Look, it’s possible,” he adds. “But, without that, it’s difficult to see what are the fundamental factors that drive down yields further. I can’t see rates really spiking but I think we have had the bottom of that cycle. It looks like it’s over.” For investors and asset managers, that could make 2022 harder to navigate than the previous year-and-a-half.
https://www.ft.com/content/6ecf9753-ffc4-4f2e-bbc4-cda4754ff41e
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