September is an important month as investors look to expectations for the end of this year and the prospects for the year to come. At the beginning of the year we said that we thought that we had taken the blows on inflation, interest rates and valuations, and that this would be the year in which we would see normalised interest rates for the first time since the global financial crisis. With US 10 year rates now at 4.3% we have reached that important milestone.
Austin Goolsby, the economist and president of the Chicago Federal Reserve Bank, has managed to coin a new term to describe what we think: Goldilocks is the typical expression for an economy in which growth and inflation are neither too hot nor too cold but just right. The golden ratio has been a measure of harmony since antiquity.
In an interview last week, Goolsby spoke about his view that the economy was on a golden path in which inflation would fall but recession would be avoided. He said that monetary policy was working and that the Fed was “nearing a point when it is not a matter of raising rates but how long to keep them high.” Goolsby referred to a study by economists at the Chicago Fed stating that “the policy tightening that the Fed has already done is sufficient to bring inflation back near the Fed’s target by middle of 2024 while avoiding a recession.” You can read the study on the Chicago Fed’s website here.
Whether it is Goldilocks or the golden path, we think that the underlying economy and in particular the quality companies we invest in are well positioned and will weather the challenges from higher interest rates. Resilience is an important attribute of quality and it is what we are expecting from our companies. They benefit from many important drivers of economic growth and investment, including the need to renew the public and private infrastructure in the United States, Europe and elsewhere; the need to invest in energy transition, water management and other improve public utilities; and the need to increase computing capacity for accelerated computing as artificial intelligence, the metaverse and the internet of things change the course of the digital economy.
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