JPMorgan Asset Management is warning that even if the Fed starts cutting rates, a renewed pickup in inflation could prevent the kind of bond rally investors might normally expect — and at the same time, it could undermine the dollar.
- “The inflation temperature is about to rise”
- “For investors, the persistence of inflation would limit potential capital gains on high-quality bonds, even with the Fed easing or in a weaker growth scenario”
- “It could also, in time, put further downward pressure on the dollar.”
The argument is:
- Inflation upturn risk – If price pressures re-accelerate, the Fed’s room to cut aggressively is limited, meaning any policy easing would be cautious and possibly less effective in boosting growth-sensitive assets.
- Bond market impact – Persistent inflation erodes the real returns on fixed-income assets. Even with rate cuts, long-duration Treasuries may not deliver large capital gains because yields might not fall much if inflation stays sticky.
- Currency implications – Higher inflation without commensurate policy tightening can erode real interest rate differentials in favour of the US, making the dollar less attractive — particularly if markets see the Fed as behind the curve.
In short, JPM is highlighting a stagflation-lite risk:
- inflation stubbornly above target,
- slower growth,
- capped bond gains,
- and a softer USD over time
This article was written by Eamonn Sheridan at investinglive.com.