Global Head of Fixed Income Jim Cielinski discusses the economic recovery, the diminishing returns on – but still pivotal role of – monetary policy, average inflation targeting and corporate balance sheets.
- Consumer confidence in their income outlook will be critical to maintaining a V-shaped recovery; much corporate borrowing has been precautionary or bridge financing that should help to lessen defaults, allowing companies to repair balance sheets in 2021.
- Average inflation targeting by the U.S. Federal Reserve (Fed) is more than just a cosmetic change as it should help limit the risk of a second “taper tantrum;" however, it is questionable whether the U.S. or other major economies will suffer inflationary pressures beyond those attributable to temporary base effects.
- Monetary policy is likely to face diminishing returns but remains pivotal in keeping financing costs low and depressing volatility; it is this suppression of volatility that will be key to tighter spreads.
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