“Transitory inflation” served as the primary justification for the late start of rate hikes by developed market central banks, despite witnessing the fastest price increases in decades.
Two years on, the central banks, particularly the Federal Reserve (Fed), appear overly keen to lower rates again, despite not having reached their 2% inflation target. The US core inflation on a three-month annualised basis has risen back to 4.2% since the previous summer without ever touching the 2% target. With the US unemployment rate hovering near historic lows, wage growth remaining at around 5%, and GDP growth projected to surpass potential, even the Fed’s forecasts do not anticipate inflation hitting the target anytime soon. The market, aligning with the Fed’s guidance, anticipates three rate cuts this year. Equities and speculative assets such as cryptocurrencies have experienced a surge, and the decline in long-term yields has significantly eased financial conditions. For the time being, the central banks’ readiness to ease financial conditions is beneficial for risk assets, but we recommend exercising caution due to the current high valuations.
