Does the Global Trend of Hawkish Monetary Policy Leave Investors with Any Place to Hide? 

The central banks of leading economies around the globe have maintained hawkish monetary policy settings in response to the breakneck inflation that emerged in the wake of the Covid pandemic.  

While bond markets expect rate hikes to eventually cure the problem of untamed inflation, excessively hawkish policy could also cause protracted economic malaise and weigh heavily on asset prices, leaving investors with few places to hide.  

With the exception of China and Japan, the central banks of almost all of the world’s major economies are ratcheting up interest rates in response to inflation.  

The US Fed has taken the lead in these efforts, recently lifting its target rate to its highest level in nearly 15 years. 

The Fed hiked its target rate by 75 basis points for the third consecutive month in September, bringing it to a range of between 3 – 3.25%. 

Federal Reserve chairman reiterated his commitment to taming inflation in pushing through the hike, as well as spoke frankly of the economic suffering that such actions are likely to cause.  

“We have got to get inflation behind us,” Powell said. “I wish there were a painless way to do that. There isn’t.” 

Hawkish monetary policy seeks to curb inflation by means of interest rate hikes. These hikes increase the cost of credit – the very lifeblood of the modern, finance-driven economy. This in turn reduces levels of economic activity, whether it assume the form of productive investment or consumption.  

Dampening levels of economic activity helps to tamp down inflation by reducing demand. This also has the inevitable effect of reducing levels of economic growth, which can have dire consequences for the broader health of the economy, whether measured in terms of unemployment levels or asset prices.  

For this reason, the ongoing round of hawkishness amongst the world’s central banks poses a major dilemma for investors – particularly given its global scope that encompasses almost all of the world’s major economies.  

The 21st century investor has access to a broader range of assets and financial products than ever before. In addition to the venerable standbys of bonds, equities, housing and precious metals, the Internet era has made it possible for investors to diversify into digital assets such as cryptocurrencies and non-fungible tokens.  

The current episode of rampant inflation and reactive monetary tightening has left no asset class untouched however, with almost all of them sustaining losses in the wake of the shift en masse towards aggressive hawkishness by the world’s central banks.   

Equities have taken a heavy hit in 2022, with the S&P 500 down 23% year-to-date (YTD), and the Nasdaq 100 plunging over 31% since the start of the year.  

Gold – considered the perennial refuge from inflation triggered by central bank profligacy, has instead fallen from US$1,800 at the start of 2022 to almost $1640, failing to provide a safe harbour for investors from endemic consumer price gains.  

Cryptocurrencies and digital assets – also long-touted as a refuge from irresponsible monetary policy by central banks, have suffered even more severe losses. Bitcoin is down over 60% year-to-date, while Ethereum has fallen more than 65% over the same period.  

Investors will need to be especially thorough and discerning if they hope to find viable investment options in today’s monetary environment – whether it be in the form of energy stocks or more risk-fraught short plays. They may also need to wait until the current round of monetary tightening is over before they can expect to reap gains from mainstream asset classes – whether old or new.