Earlier, I did a blog post showing that US inflation is at 40-year highs. This isn't just a US problem. European inflation is also at 40-year highs. And the ECB (European Central Bank) is likely to respond much as the Fed will, by raising interest rates sharply. World growth is likely to slow fast. It takes a year or longer for interest rates to affect economic growth, and even longer for them to reduce inflation. Which means that the real impact of rising interest rates on economies won't be felt until next year. However, the impact on share and bond markets, and indeed on most asset classes, is likely to be much more immediate.
Central banks might choose not to raise interest rates to the sorts of highs seen last time we had such high inflation (the Fedfunds rate briefly touched 19% in 1981!), because they may regard this rise in inflation as temporary. But ― and this is vital ― they will not stop raising rates just because the stock market falls.
To slow inflation, the real interest rate will have to be positive, i.e., the nominal rate will have to be higher than inflation. That means nominal discount rates would have to exceed 8%. CBs might argue that if the rise in inflation is temporary, they can quickly reverse the interest rate increases. But even a six month rise in rates to 8% will push economies into recession. And stocks into bear markets.
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