22 to 28 August: Careful What You Wish For

Whilst we think the near term prospects for the global economy (coming 6 months), could be somewhat better than expected as recent confidence shocks subside, we believe the developed world has a structural growth problem. Moreover, we think current policy is inadequate to address these challenges and we will therefore see policy innovation. Certainly this is expected to involve a return to fiscal stimulus but, as highlighted by Jackson Hole, it is also likely to see central banks get serious about sparking inflation. For example, Janet Yellen spoke of higher inflation targets and nominal GDP targeting, while Marvin Goodfriend proposed ideas to increase the ability to enforce negative rates such as abolishing paper currency. Considering also the market focus on helicopter money, if central banks do evolve, then their actions may no longer be so bond market friendly.

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