Inflation Tail Risk is in Play

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Inflation has not been a problem in 2018 because, as one of my blogging colleagues regularly points out, “the Federal Reserve is credible,” which in essence has prevented an inflation surge. The fact is, however, that the Fed is fighting inflation aggressively and its actions are hitting the market hard. Think about it: there have been eight interest-rate increases in the last three years — seven since President Trump’s election — with more on the near horizon. Higher rates, along with astounding U.S. economic growth, have spurred a surge in the U.S. dollar that is pummeling crude oil and the emerging markets. I expected that the success of U.S. pro-business tax policy would spur Europe to “jump on the bandwagon.” They have not, and I am especially disappointed with Britain’s Brexit plan: instead of taking an opportunity to remake the UK into a competitive, high-growth country, they are opting for Europe-lite.

Please see Voya Global Perspectives 2018 forecast tail risk on inflation shock: big-three growth rates (United States, China, Eurozone) far exceeding expectations could set off an inflation shock, sending bond prices and equity prices plummeting.

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