Quick Thoughts: Impacts of ceilings, tightening and liquidity

Head of Franklin Templeton Institute Stephen Dover recently moderated a panel of our leading economists and asked this key question: What’s in store for investors in the second half? Here’s a quick take on their answers.

In the first half of 2023, investors faced aggressive Federal Reserve (Fed) tightening, consecutive quarters of falling corporate profits, two of the largest bank failures in US history, a near-default by the US federal government, and universal predictions of US and global recessions.

I moderated a panel of our leading economists that included John Bellows, Portfolio Manager, Western Asset Management; Sonal Desai, Chief Investment Officer, Franklin Templeton Fixed Income; Michael Hasenstab, Chief Investment Officer, Templeton Global Macro; and Francis Scotland, Director of Research, Brandywine Global. I asked this key question, what’s in store for investors in the second half of 2023?

Below are my key takeaways from the discussion.

  • Inflation is going to continue to be an issue for the next 6-12 months. There are some indicators that point to a slowing in inflation and that the economy is entering a period of disinflation, where the rate of inflation is falling as prices are not increasing as rapidly. (This is not deflation where prices are falling.) Failure of inflation to retreat is a risk, and core price inflation has been sticky, but the lagged effects from tighter monetary policy have yet to be fully felt.
  • Where will interest rates settle? While the markets generally anticipate another interest-rate hike from the Federal Reserve (Fed), there appears to be a disconnect with how fast rates will drop in the future. The market is pricing rate cuts back to pre-pandemic levels, but we think the 10 years that followed the global financial crisis were an aberration; inflation is likely to revert to pre-GFC levels as the long-term norm.