MacroResearchBoard

Powell Pivot: Part II – January 31, 2022

After abandoning the transitory narrative for inflation late last year, Fed Chair Powell once again surprised the financial markets last week by moving another notch towards abandoning hyper-accommodative monetary conditions. The FOMC still did not see fit to hike rates on Wednesday and remains far behind the curve, but the message was clear: the Fed badly underestimated the breadth and durability of the rise in inflation, and now needs to get going on the long path towards normalizing policy.

A just-published report examined a number of key investment issues in view of the breakout in government bond yields in most developed markets (DM), and the negative knock-on effect this had on global equities (especially growth stocks). Investors (and DM central banks) are now being forced to rethink a key bullish narrative: the U.S. rate-hiking cycle is most unlikely to be short and shallow like the Fed’s last cycle. The report also updated our absolute return portfolio, which saw a number of changes in our positions this week to take advantage of the evolving macro backdrop, which is creating fresh opportunities and risks.