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The $ 88 billion bond fund manager said: ‘The massive helicopter spillage’ from the Fed and Washington increases the risk of inflation.

Policymakers are making a big gamble that their prodigious efforts to stimulate the US economy won’t get inflation out of control, but one of the major bond fund managers Most say it is an open question if their bet is successful or not.

“We spent enormous sums of money on this helicopter without generating more productivity on the other side of it. Policymakers bet big is that by driving demand through the roof, you will encourage suppliers to expand capacity, ”said Tad Rivelle, director of fixed income investments at TCW Group and is the manager of the Metropolitan West $ 88 billion total-return bond fund, which was once the largest active fixed-income fund.

Non-partisan Congress Budget Office projections of a federal budget deficit of 2.3 trillion dollars by 2021. At 10.3 percent of gross domestic product, a deficit in 2021 will be the second largest since 1945. , just over the 14.9% shortage recorded last year.

While The Fed has expanded its balance sheet from about $ 3.7 trillion in September 2019 to about $ 7.7 trillion in April this year, as it bought government bonds and mortgaged and implemented other measures to support recovery from pandemic coronavirus.

“This is a big test where you can isolate the economy from fundamental changes,” says Rivelle.

But he feels the ability of supply to keep up with demand is still in doubt, especially as “many manufacturers have taken advantage of their eyeballs in using leverage.”

He points to examples of US semiconductor manufacturers facing a shortage of chips, who can be slow to push costly investments in foundries, especially if they feel they are short of chips. Supply constraints may be temporary.

Supply shortages are also evident in the shortage of manufactured goods and goods, with prices for used cars, lumber and used houses soaring as the economy recovers from the coronavirus.

See: Biggest ‘inflation threat’ in the next 40 years – what stock market investors need to know

Without timely production adjustments, he said, supply problems could contribute to more severe price pressures, a point of controversy between some economists and the Federal Reserve. . Philadelphia Fed President Patrick Harker said last week that he does not see inflation out of control and that the forces that may lift prices in the coming months may be lost by the end of the year.

Like former US Treasury Secretary Larry Summers, Rivelle wondered the efforts of financial and monetary authorities to boost demand, if it continued, could see the accompanying of higher inflation.

See: Summers said the Fed should express more concern about the inflation outlook

“When you start to shake that foundation of belief by committing to a series of what will ultimately be a policy error … that’s the risk of inflation,” says Rivelle.

But he notes that the path towards higher prices is a drawn-out process. It took the United States’ continued financial deficits in the 1960s to create a frightening inflationary force in the 1970s, forcing former Fed Chairman Paul Volcker to sharply raise interest rates and curb economic growth.

But unless currency and bond markets signal when the easing of financial and credit mandates is out of control, U.S. lawmakers and central banks may continue to maintain polities. Their easy currency books.

The yield on 10-year treasury bonds

has risen about 65 basis points since the start of the year to trade at 1.563% on Friday, after rising to 1.78% in March. But Rivelle argued that bond yields would be even higher if the Fed did not monetize some of the Treasury’s bond issuances, as a result of the fiscal stimulus Congress passed over the past year. to combat the economic impact of the pandemic.

In other markets, the S&P 500
+ 0.93%

and Dow
+ 0.58%

was trading higher on Friday, but is on track to decline slightly for the week.



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