Economic and Market Commentary

Central Bank Action: Inflation or Growth?

With headline inflation at nearly 8% in the U.S. and likely to move higher in the near term, the Fed and other central banks around the world seem focused on slaying the inflation dragon first and focusing on growth later.

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Text on screen: PIMCO

Footer Overlay: PIMCO provides services only to qualified institutions, financial intermediaries and institutional investors. This is not an offer to any person in any jurisdiction where unlawful or unauthorized.

Text on screen: Tina Adatia, Fixed Income Strategist

Tina Adatia: What is PIMCO's view on how policy makers and central bankers will be acting based on the changing inflation and growth risks going forward?

Text on screen: Joachim Fels, Global Economic Advisor

Joachim Fels: Yeah, well Tina, I think the strategy by central banks at the moment is to shoot at inflation first and then ask questions about growth later. And the simple reason is that inflation here in the US is running at close to 8% on the headline measure, likely to move higher in the near term. So this is really an inflation dragon that they are trying to slay. So the intention is really to prevent an un-anchoring of longer-term inflation expectations.

FULL PAGE GRAPHIC: TITLE –Two charts are shown the title for the line chart at left reads: Higher and more broad-based inflation raises the risk that inflation expectations become unanchored; the chart plots Common Inflation Expectations, a PIMCO proprietary index, and the Personal Consumption Expenditures Price Index; it shows how expectation for inflation were relatively steady before dipping significantly in 2017 and rising significantly in January 2020. The second bar chart is titled: Market Expectations for YE 2022 Policy Rates; it shows market expectations for policy rates for the Fed, ECB, BoC and BoE for 12/31/2021 and 3/21/2022 and highlights how expectations for higher policy rates across central banks in 2022.

Longer-term inflation expectations have actually remained roughly in line with target. You can see this in the left-hand chart on this slide. This shows a measure, the Fed's preferred measure of inflation expectations. It weighs together survey measures and market-based measures.

You can see how we've had a very sharp run up in those longer term inflation expectations from the bottom during the pandemic recession, but we're still only back to normal levels that we had during the first 10 years of this century. But again, the intention is to prevent a further rise in those longer-term inflation expectations.;

Now, how do you do this? Well, you do it by being aggressive. This is what Jay Powell and his colleagues on the FOMC have been telling us. So the probability that they go by 50 at the next meeting is pretty high now. So we are seeing – we are likely to see unusual steps. You have to go back to early 2000 to find the last 50 basis points rate hike, and maybe the rate hike cycle of 1994 is a good comparison to what is likely to happen this time around.

So all in all, it seems like central bankers are remembering an old saying. The old saying is that 'Only Hawks get to go to central banker heaven'.

Text on screen: For more insights and information, visit pimco.com

Text on screen: PIMCO

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CMR2022-0328-2098285

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