Carmignac: Fighting the inflation enemy

Carmignac: Fighting the inflation enemy

Inflation Monetary policy Fed
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Please find below a comment by Frédéric Leroux, member of the Strategic Investment Committee at Carmignac, ahead of Wednesday’s Fed meeting.

The Fed’s main enemy is inflation, and it is desperate to prevent expectations of sustained inflation from taking hold. The recession that the Fed will probably provoke by its current monetary tightening is an avatar that it can withstand. In fact, it is not beyond the realms of possibility that the central bank wants a recession, given the bearish effects it would have on prices.

Under these conditions, it seems possible that the Fed will disappoint markets by not announcing an immediate reduction in its rate hiking increments. This could mean another 0.75% hike in September. This could be a temporary shock for markets, when, as late as Monday evening, many observers were still expecting a 0.50% hike.

In the short term, after the initial shock, the acceleration of tightening will probably not prevent the yield curve from continuing to flatten, nor - paradoxically - would it prevent the relative performance of long-duration risky assets from improving. Indeed, this front-loading of monetary tightening tends to result in a reduction in the terminal rate (the high point reached by key rates before the start of monetary loosening) and therefore, in less distant monetary easing, thanks to the expectation of disinflation being achieved more quickly.