Compass - Mind the lag: recession fears flare too fast

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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