Hey guys,
Long time lurker, occasional poster. Curious if someone can give me an idea why the heightened rate cycle that we are currently in is not simply a 2-3 year period?
Will we not go back to a much lower (obviously not ZIRP) era but say E at 1.5% in the next 3 ish years?
Again, not a macro person so very happy for your pearls of wisdom.
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TLDR: Geopolitics is the major driver.
Pre-2016, supply chains were very much global as US & European companies took advantage of the strong domestic FX power + lower labor costs of emerging counties to improve their margins & pricing power to consumers.
Post-2016, supply chains have become more fragmented and will continue to do so over time. A couple of thoughts regarding fragmentation:
1) Labor costs in China have also started to rise and China is currently in a transitioning period from cheap manufacturing to more high end/technical manufacturing. It takes time to diversify away from China + for other countries such as India or Vietnam to develop a similar manufacturing ecosystem that China has.
2) Tariffs are now a new norm globally
3) events such as the Ukraine war & Iran war have further incentivized governments to “hoard” their resources and boost domestic manufacturing, increasing global frictions in trade.
When the supply side of the global economy is more volatile, inflation becomes more persistent & entrenched, forcing the Fed to keep rates higher. This trend of deglobalization is likely to continue for the next decade or so as we enter a multi-polar world.
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