Investors expect central banks will tame inflation whatever the cost, even triggering recession if necessary. This may indeed be policymakers’ approach in the short term as they seek to re-establish their credibility. The European Central Bank’s decision to raise rates by 50 bps is a case in point.
- Central banks will be aggressive in the short term as they try to re-establish credibility, with the European Central Bank a case in point.
- Investors may overestimate policymakers’ willingness to hurt growth and misjudge how long it will take for inflation to respond to rate hikes.
- Inflation will stay high. Flexible duration, some real assets, inflation-adjusted bonds and select emerging markets may help investors navigate this regime.
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