Economists that work in the financial markets tend to follow the crowd. That is very economic and risk averse on their side: If they are wrong like everybody else, they will not be blamed on an individual level. If they were wrong as the ‘odd one out’, they would be more likely to have a hard time.
Today the return of inflation is the most debated topic. Is it just transitionary, due to post-pandemic recovery? Or do we face a real long-term game changer?
No matter which of the two scenarios economists follow, the crowd seems to think more and more aligned on the outlook for interest rates. The argument goes as follows: no matter to what extent and for how long a time span higher inflation levels are expected, the impact on interest rates is expected to be small or zero. Central banks are described as committed to cheap money for a long time to come. Comments on possible tapering are seen as lip service only for the sake of their role as stability agents. And it is observed that central banks have learned to control the long end of the yield curve almost as efficiently as the short end. Then economists give historical evidence for periods in history, when we had combinations of rising inflation with interest rates staying low already.
This reminds the natural human pattern to cling to the knowns and to ignore the unknowns. And to put talk over action: ‘I will start a diet/a new strategy/a reform, but not today, maybe tomorrow, and I will phase it in gradually, and maybe soon it turns out that it is not even needed`.
We will not go through all the arguments in favor of higher inflation again. They are on the media every day. But let us spend some thoughts on interest rates:
To sum it up: Continue to listen to economists. Their analysis is often sharp and enlightening. But do not turn off your own brain. And when all economists think alike, try to think a little different. To be more practical: use debt funding with low interest rates. But stop, once the debt service is not matched by the cash-flow yields of the financed assets anymore. And stay flexible – as described in our last blog post on inflation fears.