Liontrust Multi-Asset Quarter in Review - Flipbook - Page 18
Breaking down inflation: the Fed’s race against time
%, y/y
%, y/y
Forecast
10
Core services
Core goods
Food
Energy
10
Headline
8
8
6
6
4
4
2
2
0
0
-2
-2
-4
-4
2018
2019
2020
2021
2022
Source: Bureau of Economic Analysis, Haver Analytics, Deutsche Bank, FRB San Francisco, May 2022. CPI: Consumer Price Index
At a recent conference we attended, the prevailing view was that the
Federal Reserve is in a race against time on inflation, and this could
either be resolved or the whole economy exposed in a year. The
conundrum is that the Fed thinks it can get interest rates up to 3-3.5%
and inflation will come down from 9% but needs to do this quickly
while also building up dry powder for any potential recession. US
debt is too high to ‘do a Volcker’ – in the early 1980s, Fed chair Paul
Volcker hiked rates from 11.2% to the highest ever level of 20% by
June 1981, often in 2% increments and at unscheduled meetings –
as interest payments would take up 20% of the Fed budget.
Looking further out, this group has one eye on the 2024 US
presidential election, which could potentially be one of extremes, as
well as how the country proves able to deal with more fundamental
18 - Liontrust Multi-Asset Funds and Portfolios Quarterly Report: Q2 2022
shifts. The period from 2024 to 2030 will see the US losing its
crown as the world’s largest economy and, in 2026, India is set to
overtake China as the most populous country.
To be clear, we question these more bearish views and believe
the idea of a ‘global’ slowdown only goes so far: in reality, the
three largest economic blocs – the US, eurozone and China –
face very different challenges in nature and scope, which will have
implications for both any downturn and subsequent recovery.
As stated earlier, we also believe a technical, ‘small R’ recession
(two consecutive quarters of negative growth) is more likely than a
‘real’ recession, where a protracted slowdown emerges – but, as
always, are keen to take in as broad a range of views as possible.