NEW YORK and LONDON, March 30,
2015 /PRNewswire/ -- The year 2015 could be a mirror
image of the year 1981, when highly restrictive policies by the
U.S. Federal Reserve ended a prolonged uptrend in inflation,
according to BNY Mellon Chief Economist Richard Hoey. Hoey made the comments in
his March 25 commentary, State of
the Debate.
Yields peaked in 1981 when anti-inflationary policy under
Paul Volcker, then the chairman of
the Federal Reserve, was aggressive enough to halt the uptrend in
inflation. Hoey believes that today's anti-deflationary
policies by central banks will prove aggressive enough to overcome
today's risks of deflation, disinflation and lowflation. He
believes that this means that the year 2015 is likely to mark both
a bottom in inflation and the end of the long secular decline in
bond yields. This may result in a transition from the "coupon
plus" bond market of current yield plus capital gains on bonds over
much of the last three decades to a "coupon minus" bond market.
This is an echo of his Forbes magazine column in 1981 titled
Last Chance This Century, in which he stated, "I personally
believe that the peak in long-term interest rates reached during
1981 is likely to stand for at least the next century." Hoey
describes a likely mirror image opposite pattern in 2015 as
bottoming inflation and bond yields as a "reverse Last Chance This
Century."
"The central banks have placed such a priority on fighting
deflation risks that they are accepting the risk of asset bubbles
in order to generate an upward shift in current spending," Hoey
said. "Given the intensity of the banks' anti-deflationary
policies, higher inflation should return, although not for a
while." Overall, Hoey said he expects a gradual normalization of
inflation rather than upsurge to excessive inflation.
The legacy of excess capacity in many countries that resulted
from the Great Recession is a key reason for the low inflation
today, despite the low interest rates and quantitative easing, the
report said. The report notes that it has taken time to work
off this capacity. In addition increased financial
regulations that were motivated by the recession have slowed the
response to monetary policy, the report said.
Hoey is optimistic about the prospects for a long expansion in
the world economy, although he said that he expects gross domestic
product growth to be on a lower path than before the recession.
"This expectation results from a one-time downshift in growth from
the effect of the Great Recession plus deteriorating demographics
that reflect a decelerating growth rate for the working-age
population in many countries," he said. "Also, we're seeing
suboptimal economic policies in many countries."
See
https://www.bnymellon.com/us/en/our-thinking/foresight/state-of-the-debate-last-chance.jsp
for Hoey's complete economic report.
Notes to Editors:
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Louisa Bartoszek
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louisa.bartoszek@bnymellon.com
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SOURCE BNY Mellon