We will not get there in a straight line. It is going to be difficult and there could be hick-ups along the way which may force the Fed to step back from aggressive rate hikes. The steeper the hiking cycle the greater the volatility. The filter- ing out of volatility, down the risk spectrum, is a worry. It is fas- cinating what is going to happen. There are so many connotations. Lee: What is interesting about speculating when rates will rise and by how much, is that in February the Bank of England voted to increase rates by five votes to four. The four were not voting against a rise but wanted to increase rates by even more. That did not make a loud enough headline.
The other fascinating point which has not been talked about enough is the amount of quantitative easing (QE) we continue to have in the system. Back in 2009 when we started this we thought: “My God, we are printing money!” Just before March 2020 we had £445bn, at that point, we have had more than a
decade of QE and we were anticipating it to be unwound. Then bang, the pandemic hit, lockdowns, and by the end of 2020, QE more than doubled to £895bn, and yet no one has talked much about how the unwinding process will work. We know rates are going to rise slowly and they will manage that gradually, but almost £900bn is no small sum. Freedman: The Fed is conscious of causing too much volatility in equity markets. But I wonder if there is a regime shift under- way, because they will have a problem if they do not address inflation. Maybe they need to go hard and fast at the beginning with a 50-basis point hike. If it ends up that economic growth slows faster than expected because of the breaks they are putting on in terms of the cost of credit, perhaps hikes are not enough and they will, therefore, need to front load.
If you look at inflation in 2019, it was high, certainly in the US. This is not a one-year phenomenon.
April 2022 portfolio institutional roundtable: Fixed Income
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