omicron variant of the COVID-19 virus may provide a path out of the pandemic, it will only serve to amplify the inflationary pulse that is compelling sluggish central banks to move much more quickly to start unwinding their unprecedented monetary policy stimulus.
But there are demonstrable differences in 2022. In 2017, core inflation was below, not above, the Fed’s 2 per cent target, wages growth was very weak and running at 2-point-something per cent, and consumer expectations for future inflation were anchored around the central bank’s credible target.
There is arguably still a lot of run-way left in these moves. When the Fed finished its last hiking cycle in 2018, lifting its cash rate to around 2.5 per cent, the US 10-year government bond yield pierced 3.2 per cent. And that was with benign inflation and wages outcomes! Whereas the first index has almost six years of interest rate risk embedded in it, which means the index performs better when interest rates fall , the second index does not have this risk. This is because it only holds floating-rate bonds that pay higher interest rates as the cash rate climbs with the price of the bond unchanged, all else being equal.