With ultra-low interest rates a key underpinning of asset prices, what a combination of super easy monetary policy (including quantitative easing or QE) and large government deficits mean for inflation is top of mind for many investors.
This is not a straightforward question to answer. Current monetary policy settings are unprecedented. Inflation has surprised on the downside over the past decade despite heavy stimulus (including record low interest rates and quantitative easing or QE). And a few years ago a recently retired Fed governor admitted the US Federal Reserve (the most influential financial institution in the world) doesn’t have a reliable theory on inflation.
We acknowledge, therefore, the outlook is uncertain including the significant (but yet unknown) influence future policymakers will have. Outlined below is our current thinking, but we live in unique times and the outlook remains fluid particularly as we look a number of years out.