Central banks need to put rates into the 'pain zone' — but the Fed won't do it, fund manager says

LONDON — Overcoming doggedly high inflation requires interest rates to be pushed into the “pain zone.” But whether any central bank has the nerve to do it is the question, according to investment manager Man Group.

“To actually fight inflation will require a central bank to show that they’re willing to put rates into the pain zone,” CEO Luke Ellis told CNBC’s Geoff Cutmore Monday.

For the Federal Reserve, that task should be “relatively easy,” given the backdrop of strong real and nominal growth in the U.S. For the European Central Bank, battling a lackluster growth environment, the job is somewhat harder, he acknowledged.

Still, Ellis said he doubted that even the Fed would have the conviction to move aggressively enough this year — especially as headline inflation figures show signs of tapering off and U.S. midterm elections approach in November.

“The likelihood that the Fed will move really aggressively during the course of this year to push rates up high enough that it causes the pain this year, I personally really doubt,” he said.

U.S. consumer prices rose 8.5% in March to hit their highest level in three decades, but a slight ebb in core inflation offered some hope that inflation may be nearing its peak. Ellis suggested it could drop to 5-6% by the end of the year.

“What that means is the inflation goes on for longer, which means the end pain is greater,” he continued. “But it’s a matter of will they have the gumption to really drive rates up to stop the inflation.”

As such, the fund manager advised investors to position their portfolios for an “extended process of tightening.”

Corporate earnings have so far remained strong overall as companies have benefited from robust nominal growth, said Ellis.

However, there is a risk of markets becoming complacent.

“If you’ve got a company that’s got some pricing power and got some leverage, actually this is a pretty good environment — until the central banks do something about it,” Ellis said.

Discretionary stocks like Netflix, in particular, which has come under pressure from post-pandemic consumer cost cutting, could be in for a particularly bumpy ride ahead, he noted.

“If you’ve got a company like Netflix with no pricing power, I mean, sorry, but goodnight.”