LONDON – To get out of stubbornly high inflation, interest rates must be pushed into the ‘pain zone’. But whether a central bank has the courage to do so is the question, according to investment manager Man Group.
“To actually fight inflation, a central bank has to show it’s willing to push rates into the pain zone,” CEO Luke Ellis told CNBC’s Geoff Cutmore on Monday.
For the Federal Reserve, this task should be “relatively easy” given strong US real and nominal growth.
Still, Ellis said he doubted even the Fed would have the conviction to be aggressive enough this year — especially as inflation headlines show signs of slowing and the US midterm elections in November loom large.
“Personally, I very much doubt the likelihood that the Fed will move really aggressively later this year to push rates up enough to cause pain this year,” he said.
US consumer prices rose 8.5% in March, hitting a three-decade high, but a modest easing in core inflation raised hopes that inflation was nearing its peak. Ellis suggested it could drop to 5-6% by the end of the year.
It’s a matter of courage to really raise interest rates to stop inflation.
“That means the inflation lasts longer, which means the ending pain is bigger,” he continued. “But it’s a matter of courage to really raise interest rates to stop inflation.”
As such, the fund manager advised investors to position their portfolios for an “extended tightening process”.
Good night Netflix
Corporate earnings have remained strong overall so far as companies have benefited from robust nominal growth, Ellis said.
However, there is a risk that markets will become complacent.
“If you have a company that has some pricing power and some leverage, that’s actually a pretty good environment — until central banks do something about it,” Ellis said.
In particular, discretionary stocks like Netflix, which have been squeezed by post-pandemic consumer cost-cutting, could face a particularly bumpy ride, he noted.
“If you have a company like Netflix with no pricing power, I mean, sorry, but good night.”