Global economic crash warning: Expert warns US plan ‘might be worse than disease’ | City & Business | Finance
Countries across the world are facing surging inflation rates, causing many, such as the US to draw up measures to save the economy by selling off bonds. Commenting on the Federal Reserve’s plan, Tom Stevenson, an investment director at Fidelity International, claimed investors may be set for a greater shock due to the reserve’s plan to restore the economy. The Federal Reserve plans to reduce its balance sheet in the form of allowing bonds to elapse or to sell them off.
By selling off, or reducing the bonds it issues to investors, it will spark a rise in yields.
Indeed, the reduction in bonds has already seen yields on the Treasury’s 10-year bonds rise from 1.5 to 1.8 percent.
Due to these bond yields, there was a run-off of stocks in the Nasdaq and Dow Jones this month.
Writing for The Daily Telegraph, Mr Stevenson said: “During the pandemic it has doubled the size of its balance sheet again and to make a serious dent in its holdings today it is going to have to drop a load more bonds on the market than it was able to three years ago.
“Investors are betting that it will lose its nerve again this time, but they may be wrong to do so.
“The difference today is inflation, which has not been this high since the Fed was battling to overcome the crippling price spirals of the 1970s.
“The market’s fear has always been that if inflation were allowed to spin out of control, the cure might be worse than the disease.
“This is the year when we will find out.”
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Technology stocks made up the bulk of that run-off, with the sales in shares worth £1.1trillion.
Tech stocks are crucial to the US market, with five of them worth almost a quarter of the value of the other 500 on the S&P market exchange, Mr Stevenson adds.
He said: “As the relative performance of growth and value-focused shares in recent days suggests, it could rekindle the rotation away from the technology shares that have kept the market on its upward trajectory throughout the Covid period and towards the more cyclical companies that will benefit most from an inflationary boom as we come out the other side of the pandemic.
“Given the importance of those high-growth tech stocks to the US market – five shares represent nearly a quarter of the value of the S&P 500 – the bigger concern is that the other 495 will not be able to rise fast enough to make good the shortfall.
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“Their ability to do so may be determined by how quickly last year’s earnings recovery moderates into a more sustainable growth rate.”
Inflation in the US rose to seven to start 2022 when compared to the same month last year.
In order to combat rising inflation, the Federal Reserve is set to hike interests rates three times this year.
Not only did the reserve begin a $120billion-a-month bond-buying scheme (£80billion), it also owns over a fifth of the US’ $1.7trillion (£1.2billion) debt.
If the reserve were to begin to sell off bonds from the essential $22trillion (£12trillion) treasury market, it could have repercussions throughout the financial system as many are priced against Treasury bonds.
The World Bank also issued a report admitting its concern over the deceleration of the US and Chinese economies.
The bank forecasts growth rates slowing to 4.1 percent in 2022 and then 3.2 percent in 2023.
If the Chinese or US economy were to plummet, it could have severe consequences for the financial system as it could spook economists and lenders across the global financial system.
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