Despite Uptick in Inflation
- Inflation and interest rates continue to drive market sentiment.
- There should be sufficient slack in the labor market to contain wage growth.
- Long-term bond yields should remain range-bound even as they adjust higher.
- Rate market volatility to remain above recent multi-year lows as major central banks tighten monetary policy worldwide.
As a fixed income investment analyst at Capital Group, Tom Hollenberg has research responsibility for interest rates. He explains why interest rates should remain range-bound, despite rising inflation and tightening by central banks.
Q: Concerns about a rise in inflation and interest rates are driving investor sentiment and market volatility. What are your thoughts?
A: There is no doubt that inflation has turned around pretty remarkably since its period of mid-2017 weakness. We learned on Wednesday that in January the core Consumer Price Index (CPI), which excludes volatile food and energy prices, rose 0.3% month-over-month, which was above expectations. This provides further evidence that we will continue to see a gradual firming of inflation. I expect the core Personal Consumption Expenditure (PCE) Price Index — the Fed’s favored measure that excludes food and energy prices and which generally runs 30 to 40 basis points below CPI — to rise to nearly 2% this year. That should give the Fed the backdrop it needs to hike rates three times over 2018, assuming other factors don’t derail employment or growth.