Connecting the Disinflation Dots in Multi-Asset Strategies
The Federal Reserve’s latest 0.25% interest-rate hike has likely capped one of its most aggressive policy-tightening cycles in 40 years. And the cumulative 5% policy rate increase in just over a year is now starting to have an effect on rate-sensitive sectors and inflation.
Headline inflation has peaked in most major economies, mostly thanks to cheaper commodities. Core inflation, which excludes the more volatile energy and food prices, remains historically high but has leveled off. Consumers are already seeing improvements in real spending power. As a result, we expect inflation to continue to decline in the coming months—with ramifications for diversified multi-asset investment strategies.
Banking Woes Could Help Pull Inflation Down
Tighter credit conditions emerging from the banking sector crisis, which triggered a rapid repricing of interest-rate expectations in March, may add to disinflationary forces. We think the banking scenario certainly bears watching, but we don’t see this as a 2008-style meltdown. And with central banks pausing rate hikes there’s greater visibility on where rates are headed, which may add stability to financial markets.