World's Largest Asset Manager: Central Banks Are Trapped As They Can't Fight Supply-Driven Inflation

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by Tyler Durden
Thursday, Jan 13, 2022 - 11:40 PM

Back in September, when the Fed was still lying to itself and to the people that inflation was "transitory", yet when the first hints the Fed would have to tighten soon emerged, we asked a simple question: "How Exactly Do Central Bankers Plan To Resolve Supply Chain Bottlenecks." It is a question that nobody has answered yet for the simple reason that there is no answer: the Fed can at best adjust demand-side inflation but when it comes to supply chain bottlenecks (which as we showed earlier today are about to get much worse), the central banks is completely helpless.

Fast forward 5 months when the same question appears to be bothering BlackRock Investment Institute’s global chief investment strategist, Wei Li, who said in a Bloomberg TV interview that central banks are in a "very tricky spot" this year as they try to fight inflation that’s driven by supply factors, and that at the same time, four rate hikes may not be enough to control price pressures.

As a result, she said that “it’s really difficult for central banks to stabilize inflation without destroying activity,” which is precisely the point we have been making for weeks, when we say - over and over - that tightening into the current global slowdown will do nothing to address the supply-driven inflation and will instead send the economy into a stagflationary abyss, not to mention crash markets.

Or, as Li puts it, given inflation dynamics are supply-driven, “central banks should not lean too aggressively against inflation” as to not damage activity.

She also noted that the one silver lining is that growth is still “reasonably robust” but the economy is coming down from very elevated levels last year. As such the Fed may misinterpret continued slowdown with its policy working, when in reality it will only be making matters worse.

In any case, the Blackrock strategist expects “inflation to settle at levels higher compared with what we got used to, even as supply bottlenecks ease because of structural factors at play.”

In terms of markets, the firm continues to prefer developed-market stocks to emerging markets through support from fundamentals with “okay” growth and earnings.

“We see a broader robust outlook for DM equities and this is where we’re having big conviction at the moment", although a few more days like today and we are confident that the world's largest asset manager will change its tune.