Slowing Growth, Rising Inflation and the Fed

Text on screen: PIMCO

Text on screen: Should investors be more concerned about slowing growth or rising inflation?

Images on screen: Allison Boxer, Economist

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Boxer: I think the recent data makes it increasingly clear that we should be worried about both growth and inflation. So if we turn to the recent data, inflation came in above consensus expectations in June. But I think even more importantly was the fact that the sources of this above consensus expectation inflation suggested that inflation is becoming more broad-based, and also more entrenched across really a big variety of goods and services. We're seeing inflation shift to stickier items like rent and I think the overall message was that even though it looks like gas prices may be coming down a little bit, at least temporarily, core inflation looks like it's becoming more persistent. And this inflation is coming at a time when we're also seeing signs of deterioration across different growth indicators as well. So if we look at recent consumption data, recent PMIs, purchasing manufacturers indices, for example, I think we're seeing notable signs of slowing. And in particular, we think we're likely to see a slowing in both consumption and investment in the months ahead.

Text on screen: How restrictive does monetary policy need to be to address these challenges?

Images on screen: Tiffany Wilding, North American Economist

Wilding: So I think the relevant monetary policy discussion has shifted from is restrictive monetary policy appropriate to just how restrictive does monetary policy need to be? I think the current level the Fed funds rate, you know, which is still below the two and a half percent longer run rate that the Fed thinks is appropriate, you know, they would still characterize that as accommodative, and it appears increasingly out of sync with the economic situation, and U.S. domestic inflationary pressures.  You know, it does appear that they want to quickly realign monetary policy with those fundamentals, we obviously got an outsized move in the Fed funds rate announced at the June meeting, and we expect more outsized moves at the July meeting, as well as September to get monetary policy into restrictive territory. But I think there's still this question of just how restrictive monetary policy needs to be. And that's obviously very difficult to pinpoint as a result of the supply side issues, like the lingering effects of the pandemic, the war in Ukraine, but again, with domestic fundamentals around inflation also looking quite firm, I think monetary policy that is outright restrictive is appropriate right now.

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