Markets are entering a multi-year era of global interest rate hikes as central banks fight inflation, Societe Generale says

Markets are entering a multi-year era of global interest rate hikes as central banks fight inflation, Societe Generale says
Federal Reserve Chair Jerome PowellWin McNamee/Getty Images
  • Global markets are entering a multi-year rate-hiking cycle, SocGen's Albert Edwards wrote Thursday.
  • The new "Great Melt" will be centered on an upward march in short and long interest rates, he said.

Global central banks will be in a long running cycle of raising interest rates to fight stubborn inflation, an era Societe Generale's global strategist Albert Edwards has dubbed the "Great Melt" in a note published Thursday.

With that, Edwards has declared an end to the "Ice Age" theory he formulated for the global economy in the 1990s. Edwards' long-held view was that deflation would overtake the global economy, much like it had in Japan, and drive long-term bond yields down towards zero and spark a collapse in stocks.

The "Ice Age secular theme of lower lows and lower highs in Fed Funds and bond yields has already been broken in this cycle," he wrote in referring to - and agreeing with - commentary from Bob Prince, co-chief investment strategist at Bridgewater Associates, the world's largest hedge fund.

"In essence Bob Prince is saying that we are currently in only the first phase of a multi-year secular tightening cycle to address the after-effects from combining monetary and fiscal policy in a reckless fashion. In particular, Bob notes that investors have mistakenly discounted only one quick tightening cycle and so they are going to be mightily surprised."

The "Great Melt" is the new secular upward march in both short and long interest rates, said Edwards. A global recession is on the way but that will bring "only temporary cyclical relief" to the upward slope in rates. A drop in commodity prices should take headline consumer price inflation rates negative in 2023 "and provide the Fed et al an excuse to return to what they know best - ie slashing interest rates and even resuming QE" despite core CPI inflation rates sticking well above target, he said.


"As Bob Prince highlights the Fed will then toggle between rapid tightening and easing as they attempt to squeeze inflation out of the system," Edwards wrote.

The Fed in 2022 has raised the fed funds rates four times to a range of 2.25%-2.5% and investors are largely pricing in a September rate increase of 50 basis points. US consumer price inflation sits well above the central bank's target of around 2%. Headline inflation rose to 8.5% in the year through July, slowing from June's 9.1% rate that marked a 41-year high.

In July, the Fed raised its key rate by 75 basis points. Central banks in major developed and emerging markets worldwide issued nearly 1,200 basis points in interest rate hikes in July alone, Reuters reported, as monetary policy officials work to cool down hot inflation.