The Looming End of an Era

William Sterling, Ph.D.


2022 has been a very busy year for central banks as they continue with aggressive action to reduce inflationary pressures. In a significant shift, jumbo rate hikes of +75bps or more have become the new normal for “single mandate” banks, and most central banks abandoned negative/near-zero rates.  

Central Banks Rally to Fight Inflation

By September 22nd, Japan became the only major industrialized economy to hold its interest rate at near zero—and pressure is building for the Bank of Japan to act. Whereas Japan has been hesitant, the Federal Reserve in the United States shows no sign of letting up. At the last September FOMC meeting, the Fed increased the federal funds rate by +75bps and the market is expecting additional hikes culminating in a peak rate of 4.5% by March of next year. 

Central banks delivered about 500bps of rate hikes in the span of one week, which includes a surprise +100bps increase from the Swedish Riksbank. With every other major central bank (and most minor ones) hiking their interest rates, the stock of negative-yielding debt in the Bloomberg Global Agg Index has plummeted from $18.2 trillion in late 2020 to $1.8 trillion currently.  

Bloomberg Global Agg Negative Yielding Debt Market Value USD

Source:  GW&K Investment Management and Macrobond.

Recession Fears Deepen

Against this backdrop, some are beginning to raise the alarm. Former IMF Chief Economist Maurice Obstfeld recently warned that with most central banks tightening monetary policy aggressively and stimulating, they risk overdoing it and triggering a harsh global contraction. “Just as central banks (especially those of the richer countries) misread factors driving inflation when it was rising in 2021, they may be underestimating the speed with which inflation could fall as their economies slow,” says Obstfeld.    

A Bloomberg survey showed a 72% chance of recession for the Eurozone over the next twelve months and a 60% chance for the United Kingdom. In Germany, August PPI was up an astounding 45.8% YoY versus 36.8% expected and 37.2% previous. Despite the threat of a European recession, indicators (such as those seen in Germany) have led markets to expect the European Central Bank to continue increasing rates anywhere from +50bps to +75bps in both October and December.  

German Inflation Data Inflation Shocks with PPI at 45.8% and CPI at 7.9%

Source:  GW&K Investment Management and Macrobond.

In the United States, the Atlanta Federal Reserve Bank’s tracker for 3Q GDP growth has slipped from a healthy 2.5% to a “stall speed” of 0.3%. Further, the August CPI report showed both headline and core inflation remained high year on year. This is significant as “under the hood” measures like median CPI indicate a broad-based acceleration of inflation. The current 9.2% (annualized m/m for median CPI) is the highest since data began in 1983.  

Headline CPI and PPI Inflation May Have Peaked But Still Remain Very High Year-On-Year

Source:  GW&K Investment Management and Macrobond.

While the global economic landscape has shifted, central banks continue to stay the course and push back against growing recession fears. Perhaps Federal Reserve Chairman Jerome Powell offers the best summation of how they are navigating economic realities. “No one knows whether this process will lead to a recession or, if so, how significant that recession would be…nonetheless, we’re committed to getting inflation back down to 2%, because we think that a failure to restore price stability would mean far greater pain later on,” Powell said. Central bankers cannot ignore inflation and only time can tell whether they are making timely and effective policy decisions. 

Past performance is not a guarantee of future results.


Investing involves risk, including possible loss of principal. There is no guarantee that these investment strategies will work under all market conditions, and each investor should evaluate their ability to invest for a long term, especially during periods of downturns in the market.


This does not constitute investment advice or an investment recommendation.


This represents the views and opinions of GW&K Investment Management. It does not constitute investment advice or an offer or solicitation to purchase or sell any security and is subject to change at any time due to changes in market or economic conditions. The comments should not be construed as a recommendation of individual holdings or market sectors, but as an illustration of broader themes.


Data is from what we believe to be reliable sources, but it cannot be guaranteed. GW&K assumes no responsibility for the accuracy of the data provided by outside sources.



William Sterling, Ph.D.


PUBLISHED: October 14th, 2022
4 Min Read

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