Debating the Next Moves for Inflation, Growth, and Rates

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Rising inflation globally raises the question of whether inflation is persistent versus transitory, driving debate among our investment managers. Our Stephen Dover, Head of the Franklin Templeton Investment Institute, recently discussed economic growth, interest rates, and inflation during a roundtable, “What Our Managers Think: Debating the Next Moves for Inflation, Growth, and Rates,” with Sonal Desai, Ph.D., Chief Investment Officer, Franklin Templeton Fixed Income; John Bellows, Ph.D., Portfolio Manager, Western Asset; and Gene Podkaminer, CFA, Head of Research, Franklin Templeton Investment Solutions. Below are some takeaway points.

Globally, the rise in inflation is surprising many in its magnitude and duration. Shipping constraints, production slowdowns, stronger demand than expected, and continued fiscal stimulus are all contributing to this environment. I recently discussed the question of persistent versus transitory inflation with three of our investment managers: Sonal Desai, Ph.D., Chief Investment Officer, Franklin Templeton Fixed Income; John Bellows, Ph.D., Portfolio Manager, Western Asset; and Gene Podkaminer, CFA, Head of Research, Franklin Templeton Investment Solutions.

  • Our managers agree that the US Federal Reserve Board (Fed) and many countries’ central banks will likely raise interest rates in late 2022 or 2023 but disagree on the size of the increases.
  • Our managers disagree on the state of supply constraints. Are these temporary or will demand grow, exceeding pre-pandemic levels? The US economy still has savings rates close to 10%, which could support continued spending that shifts the rise in inflation from transitory to long-term status. The eurozone seems well positioned over the next year for an acceleration of its economies, while the United States, Canada, United Kingdom, Australia, Japan, and many emerging markets will likely see more modest growth.
  • With China’s new regulatory cycle and weakness in China’s property markets impacting its own and other countries’ economies, investors need to watch for downside risks.
  • Fiscal policies will likely shift from crisis mode toward supporting sustained growth once the reopening spending surge slows. Long-term disinflationary forces, including globalization, digitalization, and increasing investments in technology and innovation, have the potential to boost productivity and mitigate pricing increases.
  • Emerging markets debt, investment grade credit, and US Treasury investments can generate portfolio income without taking on excessive risk. Fixed income investments may seem costly compared to equities, but equities face risk from slowing global growth. The safe-haven status of the fixed income asset class supports continuous allocation globally.

Skillful and nimble portfolio construction and management includes selecting individual securities that can help withstand macroeconomic factors, volatility, and downside risks.

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