EXECUTIVE SUMMARY

  • The Taylor rule suggests that further monetary tightening is necessary to address the current bout of inflation. In addition, low unemployment gives the Federal Reserve scope to hike rates further.
  • However, compared with other episodes of inflation since World War II, the sensitivity of the U.S. economy to higher interest rates is exceptionally high.
  • Thus, the Fed faces a dilemma: If it is unflinching in stanching inflation, all risk assets could experience a brutal sell-off; if, as we believe, the cost of controlling inflation is too high, then inflation could remain elevated for longer, which could bolster real assets.

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The Author

Jamil Baz

Head of Client Solutions and Analytics

Lorenzo Pagani

Head of European Government Bond Portfolio Management

Greg E. Sharenow

Portfolio Manager, Commodities and Real Assets

Jerry Tsai

Quantitative Research Analyst

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