Aeroplane metaphors do little to disguise the fact that central bankers are struggling with the inflationary overshoot.
Major moments in markets tend to come with some sort of gimmick to explain them. In 2020, it was letters of the alphabet. After the initial COVID-19 crash in markets and in the economy, investors focused on what shape the recovery would take.
Cue reams of analysis over how much space pilot Powell has to work with. “The soft landing is still our base case but the runway is getting shorter and narrower,” as Nuveen’s chief investment officer Anders Persson put it last month.in that glide path is now evaporating. At this rate, that short, narrow runway will be surrounded by shark-infested waters and beset by hurricanes.
In his latest pronouncements on the matter last week, the Fed chair effectively told passengers to brace for a rough ride. Tackling inflation “is highly likely to involve some pain”, he said at a central banker get-together in Portugal.A close focus on the Fed is appropriate, of course. For all the talk of a multipolar financial system, US markets clearly dominate the global investment landscape.
“JGB yields would go through the roof,” he says. That would, in turn, likely fire up other bond yields too. He believes that on balance, it just won’t happen. “[BoJ governor Haruhiko] Kuroda will not relent,” he says. “This is a once-in-a-generation chance to get inflation up to 2 per cent.”Schroders notes that to this end, the BoJ has had to “swim hard” to hold yields down, snapping up north of ¥10 trillion of government bonds a week lately, from an average well under ¥2 trillion.