In the early days of the pandemic when prices for oil and certain other goods cratered in 2020, Loomis Sayles Vice Chairman Dan Fuss accurately predicted a resurgence in inflation to levels not seen since the 1970s. In an interview over the weekend, Fuss, who watched hyperflation surge as a top-ranked equity fund manager in the 1970s, predicted that inflation would stage a comeback to the 4% area or even higher.

Fuss, a two-time winner of Morningstar's Fixed-Income manager of the year award, made clear his expectation was not dependent on the outcome of the presidential election. “The overall economic strength is very good,” he said.

That’s why he thinks the Federal Reserve will cut the Fed funds rate only once more at tomorrow’s meeting. Though he’s not certain whether it will be 25 or 50 basis points, he said that would be its last cut for the foreseeable future.He added that a recession next year is highly unlikely.

But neither the current economic dynamics nor global geopolitics are conducive to lower inflation, he said. Controlling government spending looks challenging to say the least. If there is a Republican sweep they may try to cut spending, he said, adding he has little confidence in the ability of either party to do so.

The problem isn't just entitlements like Social Security and Medicare. There are other pressing spending needs, he said. One area where spending is “too low,” in his view, is defense. Another is electrification to meet the requirements of artificial intelligence.

Both these trends will drive the demand for capital, he said, though perhaps not as much as climate change will. The odds are not in favor of winning the battle against climate change, Fuss argues, but he hopes global leaders can manage to slow it down. “It’s good for air conditioning, bad for ski resorts,” he said.

What could turn this gloomy scenario around for the better? “If peace breaks out” and U.S.-Chinese relations were to improve, the anti-globalization movement which has fueled inflation could be derailed, he said.

He admitted this wouldn’t be popular in many quarters, but it’s possible.  “China’s big need right now is jobs for a lot of people,” he said. “They need to export [more goods] and deal with an aging population. They need more revenues per person and they are making friendly overtures.”

Fuss acknowledged that improving relations with China would be politically controversial but it’s more likely than a resolution of the Ukrainian conflict with Russia. Many U.S. politicians dislike China as an anti-democratic force, but it’s not the only driver of the rise of autocracy, he said. “Inflation isn’t good for democracy,” he said.