Inflation and interest rates- have we reached the pivot point?
The inflation debate has intensified in recent months.
In the latest edition of Franklin Templeton Investment Institute Macro Perspectives, Franklin Templeton’s investment specialists discuss what’s fueling inflation and how policymakers are combating it. They offer differing views on whether inflation will abate or accelerate as the year progresses.
The paper also explores the potential impacts of the US Federal Reserve’s (Fed’s) pivot on interest rates, Omicron-driven uncertainty, China’s macro playbook, and wage and labor expectations.
Investment Specialist Highlights
Sonal Desai, Chief Investment Officer, Franklin Templeton Fixed Income: “I think the market is being somewhat sanguine about what will happen in the second half of 2022. There is an expectation that inflation will decline sharply. I think that might be optimistic because a lot of the factors driving inflation will still be with us. The Fed is already behind the curve.”
John Bellows, Portfolio Manager, Western Asset: “Our view is that inflation is going to moderate over the next six to 12 months. If there is an environment where expectations are for higher inflation and maybe the Fed is irresponsible in its rhetoric or policy response, that creates a bit of a behavioural self-fulfilling prophecy where people expect higher prices, and businesses raise them.”
Gene Podkaminer, Head of Research, Franklin Templeton Investment Solutions: “Labour supply has not returned in the United States, which is one of the unique aspects about the American economy compared to other developed countries—we would expect the labour shortage to provoke a rise in real wages.”
Michael Hasenstab, Chief Investment Officer, Templeton Global Macro: “Most countries tend to follow the Fed, but in this cycle, we’ve seen substantial rate hikes ahead of the Fed, particularly in Latin America. In Asia, several countries have been able to maintain higher policy rates throughout the pandemic, giving them a buffer against Fed tightening. Certain local-currency valuations within these regions appear highly compelling.”
Francis Scotland, Director of Global Macro Research, Brandywine Global: “Looking at valuations, some emerging market currencies look attractive to us. A lot of emerging markets have been raising interest rates to the point now where they may start to pivot in the other direction. We do see idiosyncratic opportunities popping up across the emerging market space.”
