Report: Reflation Risk

Amid the accelerating economic recovery, the largest US fiscal stimulus outside of war times and the Fed’s commitment to keep monetary policy very easy until higher inflation is sustained have stoked concerns that the US economy is set to overheat, sending US inflation expectations and bond yields higher. Whether these concerns are warranted, and the implications for bond yields and broader markets, is Top of Mind. Given that Goldman Sachs Research growth forecasts are at the high end among forecasters, our Fed views are at the dovish end, and yet we don’t expect problematic overheating, we put our own Jan Hatzius in the hot seat. He explains that much more slack in the US economy than suggested by official estimates means that even our high growth forecasts will generate only moderate inflationary pressures, which will lessen as this year’s temporary fiscal stimulus fades. We then ask Dominic Wilson and other GS strategists what this means for bond yields (a moderate rise from here) and other assets (more upside for cyclical assets), and how to protect portfolios from reflationary risks