Until it’s over
While many are declaring the COVID-19 pandemic a thing of the past, Ferguson is more downbeat on the world’s ability to move on.
“People really want the pandemic to be over,” he said. “They really want to say we're in the post-pandemic phase. But in truth it's no more likely to be over than influenza was over.”
Ferguson said humanity only gradually got a handle on the flu “over a period of about 100 years”.
“[Expect] a very similar pattern with COVID,” he said. “Even though nobody wants to hear that.”
Besides COVID-19, the other current bane of markets – inflation – is also likely to remain a factor in the medium term, Ferguson said. He draws similarities between the current situation and the one experienced in the 1970s – when the Federal Reserve “raised rates significantly in a succession of attempts to bring inflation under control”.
“The rate hikes necessary to do that in the late seventies and early eighties [totalled] 775 basis points,” Ferguson said. “We are a very long way from that.”
He added: “My sense is the Fed will do a lot like what it did in the 1970s. It will do another 75-basis point hike, [and] maybe there'll be another hike after that.”
After that, Ferguson warned of the possibility the risk of recession will force the Fed to “blink”, curtailing its desire to cut.
“And that really will be the rerun of the Seventies,” he said.
Ferguson questioned recent decisions by the US Federal Reserve, suggesting there was no justification for the accommodative stance the Fed took to additional stimulus by the Biden administration in March 2021.
“And the Fed remained on easy mode right the way through the year, even when it was obvious… that a major inflation shock was coming,” he said. “I actually think the mistake that the Fed made in 2021 was one of the worst mistakes in its entire history.
“If you look at the monetary growth rate… related to velocity, the first and second quarter of 2021 saw a massive monetary overshoot - bigger than anything that happened in the late 60s and 1970s.
“This is the Fed at its worst and I'm afraid I really don’t believe they have a credible inflation fighting strategy, even now.”
Ferguson said the Fed’s task would be complicated by the further deterioration in conditions – including things currently not on the radar.
“It's not like history's just going to stall and let the Fed stabilise the situation,” he said. “History will keep happening and, as I said, nothing is as transitory as people thought inflation was going to be.”
Shane White is Institutional Content Manager at ANZ
This article was originally published on ANZ’s Institutional Insights website