'It will be interesting to see if central banks have that resolve. 'The more they tighten aggressively, the more economic growth will falter and slow,' Harris adds. On the other hand, he said if central banks have blinders on and are 100% focused on fighting inflation, it will probably lead to a deeper recession. Harris believes if the Fed does 'blink,' we may see a temporary market recovery. It's no secret that raising interest rates so fast has created turmoil in the economy. Harris explained that market participants may be wondering whether the Fed will buckle under pressure from politicians and others as the economy starts to slow following layer after layer of aggressive rate hikes. He added that the other thing people are thinking about right now is a possible Fed pivot. For the first time in a long while, there are real economic differences across geographies.' This has created opportunities in currencies, fixed income and equities. We're starting to see some real divergence in interest rates across the globe. 'The flip side was the Bank of Japan didn't start raising rates until the end of the year. 'The Federal Reserve had come out of the gate raising rates quickly and aggressively,' Mike points out. The first is that all of the world's central banks are not on the same schedule, which he said created some interesting macro trades last year. However, he finds two things particularly interesting. Of course, he noted that it's very difficult to predict as things stand right now. Harris is a little less sure on how bad a recession might be, but he noted that if one occurs, it could be slight, mild or deep. In its weekly commentary at the end of January, the firm stated that a recession was 'foretold.' The BlackRock team expects major central banks to overtighten policy due to worries about the persistence of core inflation, which excludes food and energy prices.

Other market participants, like BlackRock BLK, think a recession is guaranteed. And we don't know how bad the recession is going to be.' If 2022 was a year of inflation, 2023 looks to be a year of recession. '… When we look into 2023, will this aggressive hiking cycle get inflation back in check? We certainly hope so but can’t forget that it accomplished this by reducing demand, which tends to slow economic growth. 'Any time there's a 75-basis-point move, let alone multiple ones, you can tell there's a sense of urgency,' the manager pointed out. The Federal Reserve kept moving assets from its balance sheet every month and repeatedly hiked interest rates by 75 basis points, although historically, the typical move has been only 25 basis points at a time. Of course, 2022 was a year of significant monetary tightening. However, they discovered that the inflation was stickier than they had anticipated. As a result, prices soared, and central banks initially thought the price increases would be transitory and dissipate quickly. Those moves create tremendous demand, and then when the pandemic hit and caused massive supply chain disruptions due to the widespread lockdowns, there was too much demand and too little supply.

However, he noted that the challenge is when central banks lower rates to the extent they had lowered them and then print as much money as they did. He adds that on one hand, those moves had the anticipated impact of stabilizing the markets and keeping the economy on its feet despite the disruptions.

The pandemic, like the global financial crisis, forced the world’s central banks into action, easing monetary policy by lowering interest rates, printing money, and creating significant liquidity.' 'How did we get to this runaway inflation? It is pretty simple. 'It wasn't a market that most of us lived through,' he said. Like many other investors, Harris also had not invested through such an extreme inflationary cycle, although he has read many books that gave him a good understanding of what played out in the 1970s and 1980s. However, he also noted that until 2022, we really hadn't seen inflation for nearly 40 years. Thinking back to the many critical milestones we experienced in 2022, Harris believes that a large part of the year was the return of inflation, which was a powerful economic force.

Best quant funds