Central Banks BlackRock – central banks are causing recessions rather than coming to the rescue

  • We are in a new world shaped by supply. Major spending shifts and production constraints are driving inflation.
  • Constraints are rooted in the pandemic and have been exacerbated by the energy shock and China’s lockdowns.
  • We are in a new macro regime where central banks are causing recessions rather than coming to the rescue. That is clear in the rate path of major central banks set to overtighten policy as they battle inflation. We think they will eventually pause but not cut rates when confronted with the damage of sharp rate hikes – that could be the reality of recession or the appearance of financial cracks, as seen in the UK.
  • The Federal Reserve … signaled it would have to take rates higher than it originally planned, even if at a slower pace.
  • The Bank of England has acknowledged some recession is necessary to get inflation down, yet like other central banks, it is failing to acknowledge the scale of the recession needed to get it all the way down to target.
  • The ECB continues to normalize monetary policy, but a change in tone suggests it could be poised to slow the pace of hikes. We think the ECB is still raising rates into a recession triggered by the energy shock and its hikes.
  • Investment implication: We are tactically underweight DM equities after having further trimmed risk.
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