- Risk of inflation and rate increases may be underestimated by investors
- With Beijing loosening its policies, Chinese assets look good
The Federal Reserve and other central banks may need to do “aggressive” monetary tightening to fight inflation, which could cause “significant risks” for the markets, says Bridgewater Associates.
Following Jerome Powell’s hawkish comments last week, investors have moved forward their expectations of tightening. They think there will be five quarter-point rate rises this year, which is more than they thought. Then, they think the Fed will end the cycle with its policy rate at about 1.65% and long-term inflation expectations at about 2%, which is what they think will happen. A year ago, prices for goods and services rose by 7%. This was the fastest rate since 1982.
“The markets are discounting a smooth reversion to the prior decades’ low level of inflation, without the need for aggressive policy action — that it will mostly just naturally happen on its own,” the world’s biggest hedge fund said in its 2022 outlook. “We see a coming clash between what is about to transpire and what is now being discounted.”
A company called Bridgewater has become “significantly less bullish” on the value of financial assets over cash in the developed world. Because Beijing has eased its policies to help the economy, it finds Chinese assets to be more appealing.