Does the Fed have Incentive to Kill Inflation?

Macro Perspectives: Fri 22 Oct 21

We've heard from some of the most influential investors in the world over the past few days, as they gathered at Michael Milken's conference in California.

On the topic of rising interest rates, many of them see inflation as persistent and problematic, with a  few of them thinking we would see dramatically higher interest rates.

In the words of one of the great macro hedge fund traders of our time, Paul Tudor Jones, "the Fed has become inflation creators, not inflation fighters." That suggests that they have been conditioned to one-sided policy making, which explains why they are already well behind the curve on responding to what has been an obvious formula for inflation.

But the CIO of Blackrock, the world's largest asset manager, said he "doesn't see rates going up much from here."

Why? Billionaire Nelson Peltz doesn't see enough incentives for the Fed to aggressively chase down and kill inflation. He says "very few people in the world, very few groups, need higher interest rates; home buyers don't need it, governments don't need it, and the dollar doesn't need it."

How do we interpret this view?

First, what's key in this statement is "governments." It's plural. Ballooning government debt isn't a U.S. centric thing, it's global. Much like the financial crisis, the great health crisis was/is global and the recovery is globally coordinated. And global governments, especially now, don't need capital moving out of their countries and into the U.S./the dollar in search of higher yield. Not only would it damage fragile emerging market economies, but it would threaten the global economic recovery.

Additionally, a key tenet in the global economic recovery, is the global coordination of the clean energy transformation. They're all on the same team/in the same boat.

What about his comment on the dollar?

This looks like an easy mark. The purchasing power of U.S. consumers has already eroded. Next will likely be global purchasing power through a weaker dollar. So, in the end, the broad viewpoint from some of the most influential investors in the world seems to be consistent with: higher prices will be the solution for higher prices (i.e. at some point higher prices will curb demand, slow the U.S. economic growth, and ultimately resolve inflation).

This means the pain is put on the consumer through lower quality of life.