The Yield is Real
2022 started with a hope of
normalcy after two back-to-back years of dealing with the Covid-19 pandemic. But,
by no means this can be characterised as a normal year. Nobody could have
imagined inflation ever going up to 7%-10% in the developed world. The US Fed
hiking interest rates above 3% was unimaginable until it actually happened this
year.
Events, this year, exposed many
fault lines in the way systems have been working for years. The war between
Russia and Ukraine changed the geo-political and security strategies in many
countries with an increased focus on building defence capabilities. Supply
shortages in crude oil highlighted the problem of under-investments in the
conventional energy sector and constraints in the pace of transition to
renewables. Freezing of Russia’s foreign reserves raised alarm across many
economies with large foreign exchange reserves and dollar dominance once again
came into question.
These cracks will take a long
time to fill and will continue to influence the investment climate over the years
to come. While from a near-term perspective, inflation and monetary policy will
remain the dominant forces and key drivers for the financial markets.
Higher for Longer
This year central banks were in
hurry to tighten the monetary policy by hiking rates at the fastest pace
possible. The US Fed hiked the fund's rate from 0% to 4.25% in nine months. Most
of the other major central banks followed a similar path and tightened monetary
policy at a rapid pace.
This seems justified as they
started from very low or zero interest rates and inflation surged quickly to an
intolerable level.
Chart – I: Globally Central banks frontloaded Rate Hikes
in 2022
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