The US Federal Reserve should consider pivoting away from its aggressive monetary policy actions as financial conditions have tightened drastically to bring inflation down, the Institute of International Finance (IIF) said.
This emphasis on spot inflation and other data has conditioned markets to react violently to instances where data releases are meaningfully different from consensus, the Washington-based institute said in a report on Friday.
Spot data is derived from actual prices and the IIF said that historically, monetary policy has always been forecast-based, whereby policymakers target inflation two years ahead.
With the sharp rise in US inflation, this forecast-based approach has, at least to some degree, given way to the reaction to spot inflation and other data, it said.
"It is possible that financial conditions have already tightened sufficiently to bring inflation down on a two-year horizon, so reacting to spot data may raise the risk of a hard landing," the IIF economists said.
"It is, therefore, better not to react too much to the ongoing data flow ... this is why a Fed pivot to a slower pace of hikes is warranted in September. Such a pivot would also be consistent with longer-term inflation expectation."
The IIF also cited the latest US jobs report and the dollar's strong jump in reaction as one of the reasons spot data carries risks. US job growth surged in July, as the economy added 528,000 positions, defying all expectations of a slowdown.
The IIF said the the shift was on "full display" in June when Fed chairman Jerome Powell linked the acceleration of Fed hikes to higher-than-expected inflation for May and and rising inflation expectations".
"Financial conditions have tightened drastically, especially in housing, and — more fundamentally — data have gotten noisier in the Covid recovery, so it is not clear to us that high-frequency data surprises carry much information, IIF economists said.
Putting a greater emphasis on forecasts rather than on spot data will mean "it is time for the Fed to pivot — slow the pace of monetary policy tightening going forward", they said.
In July, the US said its economy had shrunk for a second quarter in a row, a “technical recession” according to commonly followed definition, as record-high inflation and aggressive interest-rate increases by the Fed hit businesses and housing demand.
The central bank last month raised interest rates by three quarters of a percentage point, which was its third increase in three months and the biggest since 1994 after inflation climbed again in May, jumping 8.6 per cent on an annual basis.
The rate of inflation, however, eased in July, with falling petrol prices providing some relief for Americans.
Consumer confidence in the housing market, meanwhile, fell to its lowest level since 2011, the mortgage association Fannie Mae said this week.
The IIF last month warned that a risk of a global recession is “rising sharply” amid a combination of shocks, including the effects of the Russia-Ukraine conflict on the eurozone, Covid-19 pandemic-related uncertainty in China and the sharp tightening in US financial conditions.
The global economy is projected to grow 2.3 per cent in 2022, compared with an earlier 4.6 per cent estimate, the IIF said in a May 26 report. It also cut its growth forecast for the eurozone this year to 1 per cent from an earlier 3 per cent estimate, saying it was a “recession call”.
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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
