What lies ahead for fiscal spending and monetary policy?

A higher volatility regime and its implications for institutions

The long stretch of stable growth and low inflation has been disrupted. Despite headwinds, markets still offer many relative pockets of strength, especially for fixed income as we emerge from a low-rate environment. Explore insights from economic leaders and investors into the ways market conditions are likely to play out in the coming months.
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Investors are braving a new world defined by heightened macro and market volatility. Central banks have strengthened their resolve to keep rates higher to moderate spending and prices, even at the cost of growth. Markets have yet to fully account for this trade-off, suggesting more volatility ahead. To prepare for the twin challenges of slower growth and heightened volatility, investors are seeking resilience and durable sources of growth.

Dynamics of the new regime:

  1. Supply-driven inflation: Production constraints are driving inflation higher. Policy action can’t directly address supply constraints, making monetary policy a blunt tool to fight inflation in the current regime.
  2. A starker trade-off: Central banks face a conundrum: either crush economic growth or live with inflation. A slowdown in economic growth now seems inevitable, but the severity of the downturn will vary greatly with monetary policy decisions.
  3. Heightened volatility: Heightened macro uncertainty is driving higher market volatility and shorter investment cycles. As policymakers navigate this new environment, we foresee a fast-evolving, uncertain future.

Positioning portfolios in a new regime

In this new environment, a historical 60/40 portfolio approach may not suffice, necessitating meaningful changes to investment portfolios.

Reassess asset class preferences

An uncharted market environment calls for investors to build a more resilient portfolio and re-examine asset class assumptions to prepare for the road ahead.

  • Short duration may help provide protection against policy uncertainty and rising rates in the near-term
  • Unconstrained fixed income can help insulate investors from central bank moves, employing a more flexible approach to adapt to changing markets and uncover novel sources of income

Get granular in portfolio allocations

In a volatile environment, investors will benefit from more granular and dynamic decisions, requiring thoughtful allocations across countries and sectors, and more frequent adjustments to holdings.

  • Natural resource strategies may serve as an inflation hedge and portfolio diversifier
  • Unconstrained equity strategies employ a benchmark-agnostic approach with the flexibility to find opportunities in any market environment

Harness durable alpha in portfolios

Volatile markets create inefficiencies and greater dispersion across and within sectors. Macro uncertainty creates opportunity for active management.

  • Hedge Funds can capitalize on market volatility and dispersion, offering downside protection with upside potential in uncertain times
  • Infrastructure can serve as an effective hedge against price pressures, insulating portfolios from higher inflation and offering reliable income to help cushion against volatility
BlackRock Future Forum

Investing in an era of volatility

At the Future Forum, we explored the complexities of the new regime and what it means for investors. Explore the replays to hear from Harvard Economist Lawrence H. Summers, BlackRock’s President Rob Kapito, and leading investors as they discuss the economic landscape and outlook as policymakers try to steady inflation without risking a recession.

Event takeaways


Bracing for an economic slowdown

The growth slowdown is not balance sheet driven and companies with pricing power and sectors that benefit from higher rates or higher energy prices are poised to outperform. Investors may also benefit from shifting some equity risk into credit, where rising rates and declining liquidity are creating opportunities for loans and private credit.


Winners and losers

Inflation has disrupted nearly all aspects of the global economy, but the impact has been uneven. As costs and wage pressures hit companies differently, the idiosyncrasies of individual business models begin to diverge. The result is tremendous opportunities across geographies, sectors, and industries for alpha generation.


Yield of dreams

After years of searching for yield in a persistently low-rate environment, the tides have turned for fixed income as central banks shift policy. With the historic drawdown in the first half of 2022, absolute yields across many areas of liquid fixed income trade at levels not seen in over a decade.

GARGI CHAUDHURI:  Talking about the fundamentals of American society I guess, you know, would love to discuss your thoughts on the Inflation Reduction Act,  which obviously you were, you know, a big part of that.  As this comes into, you know, as we’re spending more time understanding the Inflation Reduction Act, would love to hear how you think this is going to impact inflation actually and also what you think this means in terms of deficits, what you think it means in terms of different areas or different sectors of the economy that could benefit or, you know, or not from it.


LARRY SUMMERS:  I supported very strongly the Inflation Reduction Act and worked to get it passed because I thought it did some important and necessary things for American society and for the world.  Three stand out:  The broader provision of healthcare and the use of the government’s purchasing power to bring down the price of healthcare, particularly pharmaceuticals; the efforts to begin a substantial conversion to a greener, more renewable base economy using an approach based on subsidies coupled with the commitments that came along with the Inflation Reduction Act to further and larger steps to bring down the rate of barriers of various kinds associated with fossil fuels. 


It is crazy that in the United States we are shipping oil around in trucks given all the danger and potential for emissions that’s there, rather than getting pipelines built.  And I think that’s a very important thing for us to have done.


I also think it’s important for the society that we collect taxes in a reasonable way.  Inscribed on the Internal Revenue Service building is a quote from Justice Oliver Wendell Holmes, taxes are what we pay for civilization.  And so, I think the efforts to strengthen tax enforcement will over time lead to substantial deficit reduction and represents highly desirable steps. 


So, I think this was good legislation.  I think the lower prices of pharma and energy, coupled with the fact that there is limited deficit reduction in the bill, will make a positive contribution with respect to inflation.  I don’t think it is sufficient to be decisive.  But I think it is going in the right direction.  I do think that it is likely, and these forecasts are extremely uncertain, that we’re going to have to find further ways to confront our deficit situation and our growing national debt situation over time, though the magnitude of that problem will depend very much on what happens to interest rates. 


GARGI CHAUDHURI:  Yeah.  Makes a lot of sense.  So, especially as it pertains to healthcare costs, obviously I, we all know that that’s a huge part of PCE or a larger part of PCE measures as opposed to CPI.  Do you think as the Fed formulates their Statement of Economic Projections over the next few quarters, do you think they will start incorporating some of that into their forecast and, therefore, moving their estimates or estimates of PCE and core PCE lower as a result of the inflation reduction that comes as a result of this?  Or do you think it’s still way too far out for it to really impact policy in any way?


LARRY SUMMERS:  I think that it will be one of the things that will be recognized, but I'm not sure it’s a terribly large factor over the relevant horizon.  What I am more worried about for the short-term is a variety of cost pressures placed in the healthcare sector.  There are large numbers of workers burning out after what they’ve been through during the COVID period.  There are shortages of skilled nurses in many parts of the country.  There are people hiring traveling nurses, because they’re desperate for nursing care, paying several hundred dollars an hour.  There are substantial backlog of people who deferred procedures during COVID because they couldn’t get them done or because hospitals weren’t very safe places to be during COVID.  And so, I am fearful that we have some pent-up acceleration of inflation in the current environment.

Bonus: The economic impact of the Inflation Reduction Act

Dr. Lawrence Summers shared his insights on the how the Inflation Reduction Act may help ease production constraints while paving the way for infrastructure improvements and healthcare access.

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