Inflation has spiked across the developed world
Source: Bloomberg Finance, L.P., as of October 27, 2021. MOVE Index refers to the ICE BofAML U.S. Bond Market Option Volatility Estimate (MOVE) Index. VIX refers to the Chicago Board Options Exchange (CBOE) Volatility Index (VIX).
- The Federal Reserve has, even more than usual, been at the forefront of investors’ minds recently as policymakers have debated how and when to withdrawal the Fed’s easy accommodative policies amid rapidly rising inflationary pressures.
- At his post-meeting press conference this week, Fed Chair Powell sought to assure markets that policymakers’ path remains flexible as they balance the Fed’s dual mandate of achieving maximum employment with price stability (AKA, keeping inflation in check). Despite Powell’s emphasis on patience, investors increasingly expect multiple rate hikes in 2022 as the Fed attempts tamp rising inflationary pressures.
- Yet, the Fed is not the only central bank currently engaged in a battle against inflation. Consumer price index (CPI) readings have jumped across many developed (and developing) countries. September’s CPI readings in the U.K., Germany and Canada, for example, climbed as high as 3.1%, 4.1% and 4.4%, respectively.1
- Like the Fed, many central banks have pivoted toward less accommodative stances in recent weeks. The Bank of Canada and Reserve Bank of Australia have each wound down COVID-era support measures while accelerating their timelines for rate hikes. (For its part, the ECB still calls a rate hike “very unlikely” in 2022.)
- Interest rate volatility does not yet appear to have impacted U.S. equity markets. As the global inflation story continues to impact real returns, however, investors may be prudent to remain flexible and balanced in equity allocations while remaining prepared for potential volatility across their equity and fixed income allocations.