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Persistent Inflation Constrains Policy

Seeking Alpha
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⚡ Quantum Brief
Central banks face persistent inflationary pressures that predate recent Middle East supply shocks, limiting their policy flexibility. The Fed and other key banks are expected to hold interest rates steady this week amid conflicting growth-inflation trade-offs. Equities are now favored over government bonds as markets adapt to sustained higher yields. The S&P 500 hit record highs despite rising oil prices, signaling growing confidence in AI-driven economic expansion. Long-term government bonds lose their traditional role as portfolio diversifiers due to prolonged elevated yields. Investors are recalibrating strategies as fixed-income assets underperform in the current inflationary environment. The AI sector’s perceived potential is reducing skepticism, with markets pricing in future productivity gains. This shift supports equity valuations even as geopolitical risks and energy price volatility persist. Geopolitical tensions in the Middle East exacerbate existing inflationary trends rather than create new ones. Central banks must now navigate structural inflation challenges without clear monetary policy tools.
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Persistent Inflation Constrains Policy

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Jean Boivin, PhD1.63K FollowersFollow5ShareSavePlay(8min)CommentsSummaryInflation pressures predate the Middle East supply shock, leaving central banks constrained on policy. We prefer equities over government bonds.The S&P 500 crawled to a record even as oil prices rose on more Middle East disruptions. It shows skepticism over the AI buildout’s payoff is dissipating.We expect the Fed and other key central banks to leave policy rates unchanged this week as they face a tough trade-off between growth and inflation. Benjamas Deekam/iStock via Getty Images Transcript We think the Middle East conflict only piles onto inflationary pressures already bubbling under the surface. Higher yields are here to stay, in our view. That means long-term government bonds are no longer effective diversifiers againstThis article was written byJean Boivin, PhD1.63K FollowersFollowJean Boivin, PhD, is head of economic and markets research at the Blackrock Investment Institute. Prior to joining BlackRock, Dr. Boivin served as deputy governor of the Bank of Canada and as Finance Canada’s associate deputy minister and G7/G20 deputy. He has taught at Columbia Business School and HEC Montreal. He writes about the global economy, global markets and policy.

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Source: Seeking Alpha