Central banks walk a tightrope amid need to curb inflation, boost the economy
The markets have been closely monitoring the development of inflation and the central banks’ response to it for months, an issue that raised its head once again this Monday with the announcement of Jerome Powell's re-election as chair of the US Federal Reserve. Powell has a more orthodox profile, and the market consensus is that he will soon decide on upcoming interest rate hikes. The other candidate being considered—Lael Brainard, who was ultimately named vice chair—is known for her more supportive stance towards monetary stimulus and could have delayed the rate increases.
The news caused bond yields to start the week higher, a movement that Ismael García Puente, manager and fund selector at MAPFRE Asset Management (MAPFRE Gestión Patrimonial in Spanish), simply sees as the dissipation of the reservations that investors had shown ahead of any surprises in the Fed chair's renewal. "The picture hasn't changed. We know the central banks are going to have to deal with a difficult situation, with inflation that will remain high for some time, but their main business is to support growth and recovery in the labor market,” he stated in an interview on the program “Ponte en Acción” on Negocios TV.
"They seem to be walking a tightrope, with the additional problem of the dependence they have created on their decisions in the financial markets," the expert explains. He also pointed out that this dependence will add difficulty ahead of upcoming measures that the central banks will have to announce and the assessment they will have to make of their messages’ impact.
Transferring this situation to the investment field, García Puente acknowledges that one of MAPFRE Asset Management's biggest concerns is the highly polarized response of different stocks to any news, which "makes positioning quite a challenge, at least for the short term.” For example, the Federal Reserve chair’s reappointment boosted banks like Goldman Sachs and JP Morgan by 3-4% while leaving all the Nasdaq companies in the red by around 4%.
Francisco Rodríguez Asil, director of Lonvia Capital, also spoke on Negocios TV and believes that the normalization of interest rates is where "economies should healthily move.” He encourages a "positive reading" of this trend as a sign that recovery is being consolidated. The manager expects the rise in inflation to be temporary due to “strong deflationary pressures for the next few decades.” However, for protection against the current uncertainty, he recommends investing in quality companies that are capable of transferring inflation to their margins.