Fuss Says 1970s-Style Inflation Coming

Fuss Says 1970s-Style Inflation Coming

Loomis Sayles vice chairman Dan Fuss is confident that the long-term outlook includes 1970s-style inflation and doubts that the U.S. economy is headed for a V-shaped recovery. This according to an article in Advisor Perspectives.

Speaking in a recent webcast discussion with Fidelity’s director of research Lisa Emsbo-Mattingly, Fuss said, “Credit fundamentals are not good in a fairly broad area,” adding that a recovery will likely be more like “a couple of Ws hooked together with a slightly upward slope.”

Mattingly and Fuss agreed that the approach taken in the coming year by the U.S. government and the Fed in terms of fiscal and monetary policy will be affected by many factors (including the outcome of the presidential election, the trajectory of the pandemic and U.S.-China relations) and that negative interest rates won’t disappear anytime soon. According to Fuss, policymakers will focus on the risks associated with civil unrest in the shorter-term and climate change in the longer-term.

While the “outsized” response by the Fed was warranted, Mattingly pointed out that the increased debt resulting from such huge government spending raises a lot of questions—specifically, whether it will lead to inflation. She noted that global debt as a percentage of GDP is at “almost incomprehensible levels, and this was long before COVID hit,” adding that “many people argue that the only way you can deal with that amount of debt is with inflation.”

Both Fuss and Mattingly agree that inflation is coming, but they don’t know when. According to Fuss, it will feel like the experience of the late 60s and early 70s: “I think it’s going to get out of hand. So, the question then becomes, how can an individual central bank, in this case the U.S., control it?”  That said, Fuss suggested that inflation may not be the biggest problem the U.S. faces, noting, “if this U.S. and China thing doesn’t get resolved, it will be irrelevant.”