BlackRock Investment Institute

Macro insights

Financial conditions still supportive

We expect central banks to maintain their extremely easy policy stance, despite the prospect of an accelerated activity restart later this year. The Fed and European Central Bank have reiterated their commitment to maintaining monetary policy support until inflation rises meaningfully toward targets. Yet we expect a more muted reaction in policy rates even if inflation expectations continue their climb. Consequently, financial conditions are likely to stay supportive of growth, as shown in the chart below.

Easy financial conditions
BlackRock Financial Conditions Index (FCI), 2019-2021

BlackRock Financial Conditions Index

Source: BlackRock Investment Institute, Jan 2021. The financial conditions indicator (FCI) shows the implied rate of GDP based on its historical relationship with our growth GPS. The BlackRock Growth GPS shows where the 12-month forward consensus GDP forecast may stand in three months' time. The FCI inputs include policy rates, bond yields, corporate bond spreads, equity market valuations and exchange rates.

Fed expectations for a rise in inflation have typically gone hand in hand with a rise in the projected policy rate. Yet the policy rate has become less sensitive to changes in the inflation outlook – a trend we expect to be cemented by the Fed’s shift in its policy framework to allow inflation overshoots to make up for past undershoots.

The bottom line: In the new nominal environment, inflation can rise and even materially overshoot its target. Yet we will likely see a far smaller rise in policy rates and nominal bond yields than in the past.

Recent macro insights

Slowing growth momentum
Growth momentum has slowed in the U.S. and euro area over the summer even as the absolute level of activity stays elevated. September activity surveys showed a drop in both...
New nominal still holds
Fed Chair Jerome Powell indicated that a taper announcement could come in early November, and that the taper itself could be complete by mid-2022. Yet he also stressed the ...
U.S. inflation set to stay higher
The August U.S. Consumer Price Index (CPI) showed a surprising cooling of core price pressures. Some of the categories seeing a spike during the restart, such as used car p...

Stay ahead of markets with the latest insights from the BlackRock Investment Institute.

Please try again
First Name *
Please enter a valid first name
Last Name *
Please enter a valid last name
Email *
Please enter a valid email
Investor type *
This field is mandatory
Country *
This field is mandatory
Company *
This field is mandatory
Thank you
Thank you for your subscription!
We usually publish weekly insights on every Monday. Expect to receive your first newsletter from us this upcoming Monday.