The inflation theme has remained front and centre for global equity markets so far this week thanks to contradictory comments from Janet Yellen, the US Treasury Secretary and former Fed Chair.
Having said over the weekend that she doesn’t expect Joe Biden’s latest $4tr fiscal plan (which includes spending on infrastructure, childcare and education) will cause any inflation problems because demand will be spread out over a long period of time, just two days later (on Tuesday 4 May 2021), she stated that US interest rates may need to rise to prevent the US economy from overheating.
Although she quickly backtracked by explaining that she wasn’t “predicting or recommending” an increase in US interest rates and stressed that the Fed’s (the US central bank) policies were independent of the US government, unfortunately the damage had been done: global equity markets had been on a roller-coaster ride.
While it’s no surprise equity markets initially sold-off as Janet Yellen’s comments came hot on the heels of last week’s suggestion by Robert Kaplan, the President of the Federal Reserve Bank of Dallas, that the Fed should start to tighten monetary policy, thankfully John Williams, the President of the Federal Reserve Bank of New York, this week said exactly what we have been forecasting: while inflation will rise sharply in the coming months, he expects inflation to quickly come back down to the Fed’s 2% target and as such, the Fed doesn’t need to change its current loose monetary stance.
Inflation is not just a key theme in the US, but globally – and hopefully later today (Thursday 6 May 2021) we will hear if policymakers at the BoE also believe the UK’s inflationary pressures are transitory.
However, this week’s equity market volatility highlights the market’s current obsession with whether or not persistently high inflation is coming – and while we believe a sustained rise in inflation is unlikely, we fear this obsession will unfortunately result in elevated market volatility over the coming months, as the year-on-year inflation readings quickly accelerate as last year’s distorted oil price passes through, before quickly fading.
Consequently, while it may be an unsettling couple of months ahead, long-term investors need not be concerned – and please remember that all of the teams at my wealth are here to help you with any portfolio queries or concerns you may have, while our Advisers can provide you with regulated financial advice, should you need it.
Investment Management Team