Macrocast

Alignement des incitations

Key points:

  • More than the message from the “median Fed forecaster” we focus on the polarization within the FOMC. We remain in the “it’s a transitory” camp on inflation, but we reiterate our view that US real rates should go higher.
  • We take a hard look at Rhaguram Rajan’s proposal to align the incentives of high and low carbon emitters towards the green transition.

Last week was dominated by the change in the Fed’s open-market committee members’ median forecasts for the policy rate. As such, bringing forward the Fed Funds lift-off to 2023 makes the trajectory more realistic as the market never believed the central bank’s previous trajectory in which policy rates would not change before 2024 (our own baseline has been two hikes in 2023 since the end of last year). What we focus on is the polarization of the FOMC across doves and hawks as the distribution of the members’ individual forecasts is widening. There are still doves who don’t want to contemplate hikes in the “policy relevant horizon” at all, and hawks who seem to get ready for a higher number of hikes. This polarization echoes the general debate on the possible fate of the current inflation spike. We remain in the “it’s transitory” cam”, which seems to still dominate at the Fed even if clearly some members are not inclined to take chances.

The market has responded to the new Fedspeak with a flattening of the US curve. We find this move itself understandable, but we remain puzzled by the level of yields at the very end of the curve, which we find low compared to the Fed’s median forecast for the “longer-term” Fed Funds rate. We reiterate our view that there is a plausible macroeconomic case for a rise in real rates in the US. We complement our argument by adding some considerations on supply and demand conditions on the US bond market in the next one or two years. US banks have raised their share in the ownership of US public debt, which for the recent period we attribute to the combination of a “deposit glut” which needs to be recycled and low demand for credit from the private sector. As the economy continues to reopen, we think this factor will fade, adding upward pressure to yields as the Fed tapers.

Last week we promised to extend our analysis of the G7 summit’s conclusions pertaining to the funding of the green transition in the less advanced economies. We were intrigued by Rhaguram Rajan’s proposal of a Global Carbon Incentive which would drive high CO2 emitters to curb their emissions and low emitters to keep them low. We have issues with the design of his formula – focusing on CO2 per head and ignoring CO2 per unit of GDP triggers all sort of adverse side effects – but his point on the potentially antagonistic interests of developed and less advanced economies when it comes to decarbonization holds. We think he dismisses carbon border taxes too easily as a solution, especially if the proceeds are recycled to fund transition projects in the South.

This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.

It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date.

All information in this document is established on data made public by official providers of economic and market statistics. AXA Investment Managers disclaims any and all liability relating to a decision based on or for reliance on this document. All exhibits included in this document, unless stated otherwise, are as of the publication date of this document.

Furthermore, due to the subjective nature of these opinions and analysis, these data, projections, forecasts, anticipations, hypothesis, etc. are not necessary used or followed by AXA IM’s portfolio management teams or its affiliates, who may act based on their own opinions. Any reproduction of this information, in whole or in part is, unless otherwise authorised by AXA IM, prohibited.