“Globalization did what textbooks said it should in that production moved to where production is most efficient around the world,” he said. “The unfortunate reality was that the United States was not a very productive place, so production went offshore.
"Our whole deflationary trend was highly reliant on globalization, and I would argue that was the number one factor rather than the result of tremendous economic and monetary policy,” he continued, noting that the return of manufacturing to the U.S. likely means that Americans should expect higher prices for goods.
Cameron Dawson, chief market strategist at Fieldpoint Private Securities, commented that rising inflation means the Fed will be forced to raise the federal funds rate numerous times in order to quell higher prices. That process has already begun and will likely continue into next year. And that’s bound to result in unforeseen consequences.
“Something breaks every time the Fed tightens,” she said. “We should think hard about what will break in this cycle.”
Sara Devereux, principal, and global head of fixed income at Vanguard, said the economic pathway is less certain in a rising rate environment. “It can feel like taking the staircase to nowhere,” she said.
She noted that the rapid recovery from the two-month Covid recession in 2020 was supported by monetary and fiscal policy.
“That support was necessary, and it was effective,” Devereux said. “But now it’s payback time, as central banks are now faced with removing that support and threading the needle between stopping inflation and not hurting growth.
“We all knew this was coming, but that was compounded by Russia invading Ukraine,” she added, noting that during such geopolitical events you look at the longer-term repercussions and how it affects the long-term macro environment. In this case, the long-term impact in a global macro sense is inflation. Specifically, the cost of energy and food.
“The extreme energy shock can not only amplify inflation, but it can also destroy demand at the same time, resulting in a drag on growth and possibly even recession,” Devereux said. “We think odds of a recession in the next nine to 12 months are low. But even at low, the odds of recession are climbing, particularly in Europe because it’s close to the war in Ukraine."