The story of King Canute goes that he stood in front of the tide demanding that the sea recede. This is a story of greater forces humbling power.
The Federal Reserve’s messaging is clear: it wants full employment and inflation at 2%. But, higher interest rates and aggressive communications will not be enough to fan the inflation flames. Firstly, inflation is far more persistent than the market imagines. Secondly, policy measures take time to kick into effect. Thirdly, there are too many moving parts.
The US inflation problem isn’t going away in a hurry. For at least another year, the Fed will raise rates. But will this be enough? And will it produce the desired results?
If things go the Fed’s way, everything will revert to normal. But if it doesn’t, the Fed might find itself in King Canute’s shoes shouting at the tide of inflation. And things may take significantly longer to return to normal, or a new normal will form.
Investors must protect themselves from the flipside. This means moderating return expectations, shifting to safer assets, and calibrating future investments.