‘Here To Stay’: These Asset Managers Say Markets Are Underestimating Inflation

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‘Here To Stay’: These Asset Managers Say Markets Are Underestimating Inflation

John Hugh DeMastri on January 10, 2023

Major asset managers are pushing back on the market’s expectation that inflation and U.S. interest rates have peaked and are unlikely to do significant further damage to the economy, a mistake markets made in early 2022, Bloomberg reported Tuesday.

Some of those issuing warnings include the world’s largest asset manager, BlackRock, Fidelity and French asset manager Carmignac, according to Bloomberg. Frederic Leroux, a member of Carmignac’s investment committee, told Bloomberg that markets are too optimistic that inflation will return to 2.5% by next year, citing worker shortages and the risk of energy shocks pushing inflation.

“Inflation is here to stay,” Leroux told Bloomberg. “After the crisis central bankers thought they could decide the level of interest rates. In the past two years they realized they don’t: inflation does.”

BlackRock anticipates that both inflation and interest rates will remain elevated, and although it doubts that the Federal Reserve would cut interest in a recession, it will at least slow the pace of rate hikes, according to Bloomberg. Leroux said that investor interest in the potential for the Fed to cut rates is “a sideshow,” and investors will have to wake up to the reality of persistent inflation.

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“Central banks are unlikely to come to the rescue with rapid rate cuts in recessions they engineered to bring down inflation to policy targets. If anything, policy rates may stay higher for longer than the market is expecting,” wrote financial analysts at BlackRock’s Investment Institute, according to Bloomberg. Global Marco Director Jurrien Timmer of Fidelity Investments said that inflation remains a risk for the economy because the Fed has repeatedly stressed that it will not cut interest rates until inflation returns to 2% exactly, the Fed’s longtime target.

Some funds, such as Dutch asset manager Robeco, which manages roughly $250 billion, believe that inflation has peaked and that a recession would spur central banks like the Fed to cut interest rates, Bloomberg reported.

‘Here To Stay’: These Asset Managers Say Markets Are Underestimating Inflation

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