Monetary policy will take a backseat to fiscal policy next year as the U.S. economy begins to inflate owing to expected big infrastructure spending and tax cuts.
That was the theme of a BlackRock conference on Tuesday in Manhattan.
“The theme is a shifting away from a reliance on monetary policy to do all the heavy lifting,” according to Jeffrey Rosenberg, Black Rock’s chief fixed income strategist. He predicted the end of negative interest rates and the steep yield curve. The expectations of the market are for a flat yield curve, Rosenberg said.
“The new theme is reflation, growth, less monetary policy, more fiscal policy,” he said.
“Growth has been broad based and that gives confidence that this is something that is fairly robust,” added Isabelle Mateos y Lago, chief multi-asset strategist with BlackRock Investment Institute. She said that this is the first time in several years that all major economies are participating in growth at the same time.
Growth will be fueled by anticipated U.S. tax cuts and more government spending, but BlackRock officials said the amount of growth will depend on many factors, including how much of the Trump economic plans become a reality.
What does that mean for investments?
Equities, TIPs, emerging market and bank stocks will be among the investments that will prosper from these trend changes, BlackRock officials said. They added these trends were developing before the election of Donald Trump but should now accelerate.
Steep yield curves, Rosenberg said, have been discouraging the incentive for bank loans, but that will now change. The flat yield curve “represents a fundamental change and creates better incentives for bank lending. This increases money velocity, which contributes to inflation.”
And the return of inflation, BlackRock officials added, will be good for securities tied to inflation.