You can blame it on geopolitical risk, the pandemic or politicians jockeying for votes, but bond managers at Canso Investment Counsel believe the economy is far from the soft landing many are hoping for – and blame it partly on “Rambo central bankers.”
“It’s going to take a lot of ‘equal and opposite’ monetary action to get the inflation reaction that the central banks want,” the bond managers say in their April 2022 Market Observer.
“The monetary and fiscal stimulation applied to the U.S. economy was unprecedented. It’s going to take quite a lot in the opposite direction to get things back to normal.”
“The Fed’s traders aren’t using ‘Precision Guided Weapons,’ they are really ‘Area Bombing’ to get the results they want. They overcorrect and undercorrect like any human being, working with imperfect information,” the newsletter reads.
“When rates get around their target, the traders at the Federal Reserve stop and see what happens. They don’t know what will happen the next day.”
For bonds, the Fed’s inconsistent messaging and the sudden fierceness with which it decided to go after inflation means “sharply rising yields” and no influx of capital to fixed income as a safe bet following Russia’s invasion of Ukraine.
“The bond market had been impounded by rising administered rates from central banks, but was shocked this quarter by the tough talk coming out of central bankers… It moved from impounding a gradual reversal of the easy monetary policy of the pandemic to a much quicker return to monetary normalcy,” Canso says.
“The Fed moved from ‘measured increases’ of .25% in Fed Funds to reprising Rambo with their pronouncements of .5% or 1% rate hikes in a flurry of comments by Fed Governors. The bond market noticed.”
Whether the Fed or politicians who’d bear the brunt of the public’s anger by raising rates in this manner will have the fortitude to follow through on the tough stance they are presenting remains to be seen.
“We are likely to have too little, too late, and could have inflation at much higher levels for another few years at least.”
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