Hedge-fund giant sees growing threat of a ‘1970s-style’ inflation shock: report

Hedge-fund giant sees growing threat of a '1970s-style' inflation shock: report

One of the world’s largest macro hedge funds sees a rising risk of a 1970s-type wage-price spiral, according to a Thursday news report.

“This combination of high inflation, tight labour markets, and uncertain inflation expectations introduces the prospect of a 1970s style wage-price spiral which proved very costly to reverse during the Volcker Era,” Brevan Howard Asset Management said in a note to shareholders of a listed fund that it manages, Bloomberg reported.

A Brevan Howard representative didn’t immediately respond to a request for comment on the report.

The late Paul Volcker was appointed to head the Federal Reserve in 1979 and led an aggressive tightening of monetary policy that pushed interest rates to unprecedented levels as it battled running inflation that hit nearly 20%. The Volcker Fed was credited with breaking the back of inflation, but the effort also resulted in a deep recession.

Brevan Howard said the Fed is “significantly” behind the curve when it comes to raising rates, according to the report, saying rates should be between 4% to 6%.

The Federal Reserve earlier this month delivered its first rate hike in four years, lifting the fed-funds rate to a range of 0.25% to 0.5%, and has penciled in further quarter percentage point increases in its remaining six meetings of the year, while Fed Chairman Jerome Powell has left the door open to increasing rates in larger increments.

Inflation has been running hot as the economy deals with supply-chain bottlenecks and strong consumer demand for goods, both tied to the effects of the COVID-19 pandemic. Russia’s invasion of Ukraine has stoked those inflation worries by contributing to a surge in a range of commodity prices, including oil, wheat and key industrial metals.

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U.S. stocks saw a volatile first quarter, with the S&P 500
SPX,
-0.92%

for a fall of 4%, which would be its first quarterly decline in two years, but has bounced off a March 8 closing low to exit correction territory earlier this week, leaving it around 5% below its record finish from early January. The Dow Jones Industrial Average
DJIA,
-1.03%

was down around 290 points, or 0.8%, in Friday’s session.

The Brevan Howard Master Fund was up 6.6% for the month through March 25, leaving it with a gain of 9.25% for the year, Bloomberg reported, citing an investor letter. The fund manages around $8.5 billion, while Brevan Howard has around $19 billion in assets, the report said.

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