Don't be happy too soon! Will inflation come back with a "backstabbing" move?
Inflation risks cannot be ignored, TS Lombard warns that global monetary policy easing and the re-emergence of monetary supply growth have increased the risk of prolonged low inflation. Although the market expects the Federal Reserve to continue cutting interest rates, sticky inflation factors are still rising, sparking concerns about a 1970s-style inflation trend. With the economic slowdown, the Federal Reserve's fund rate may fall to 3.75%, but the expectation of inflation returning to 2% may be a fantasy, and the inflation risks brought by excess liquidity should not be underestimated
Despite the market having lowered its guard against inflation, macro research company TS Lombard warns that it is still too early to ignore the risks of inflation.
The company points out that global monetary policies are currently easing, and the growth of money supply is rising again.
TS Lombard states that the rapid implementation of loose policies increases the risk of the current low inflation rate disappearing in an instant, especially in a situation of continued excess liquidity. The company speculates that unless data suddenly deteriorates, the Federal Reserve will stick to lowering interest rates by 25 basis points at each meeting. In other words, the market is already a step or two ahead of the Federal Reserve.
Currently, whether in the United States or the Eurozone, categories with stronger and more persistent stickiness have always been the main factors driving up inflation.
In addition, TS Lombard warns that the current trend of inflation seems to be similar to that of the 1970s.
TS Lombard states that as fiscal policy will face stricter constraints, such as increased real yields leading to higher government interest payments, providing economic stimulus now is more likely to rely on monetary policy. Since the Federal Reserve and the European Central Bank had raised interest rates significantly in response to inflation, they now have more room to adjust rates, while also leaving behind the risk of reigniting inflation.
So, how much room is there for interest rate cuts?
TS Lombard believes that with an economic slowdown looming, the Federal Reserve's federal funds rate will reach 3.75%, but an economic recession will ultimately be avoided, and the expected inflation rate returning to 2% will prove to be a fantasy.
The company states that the market has not even considered what the Harris or Trump administration might do, deliberately ignoring the risks of worse inflation outcomes. However, the Federal Reserve should not overlook the inflation risks brought about by excess liquidity **
The United States used a huge amount of liquidity to save a not-so-serious recession during the pandemic, leading to a surge in inflation.
As for the Eurozone, before the European Central Bank cut interest rates, the region's money supply and bank lending growth had already accelerated.
Eurozone M3 money supply and bank lending growth