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Rising Inflation and Interest Rates: What Investors Need to Know

Tom Wald, CFA®, Chief Investment Officer, Transamerica Asset Management, Inc.

With inflation now having reached its highest rates of increase since the early days of cable TV and Diet Coke, investors are facing the highest levels of market volatility since the initial COVID-19-induced sell-off two years ago. In addition, rapidly changing expectations of Federal Reserve policy in response to inflation have sent short- and long-term interest rates higher. As both inflation and interest rates are likely to keep increasing into the months ahead, we believe investors should keep the following points in mind. 

  • We believe inflation reports, such as the consumer price index (CPI) and the Fed’s preferred metric, the personal consumption expenditures price index, will continue to remain hot into the second half of the year. The CPI for the month of January reported a year-over-year headline increase of 7.5% and a core (ex food and energy) reading of 6.0%. These are the highest headline and core rates of inflation since February and August of 1982, respectively.  However, as global supply chain challenges and worker shortages potentially begin to ease in the summer months and annual comparisons come up against the rising monthly reports of last year, there is a path, in our judgment, for inflation to subside toward the 3% range by year end.
  • We are again raising our expectations regarding Fed rate hikes in CY 2022. We now see a strong probability of six quarter-point rate increases between now and December, with the federal funds rate likely concluding the year with a target range of 1.50%–1.75%. We also now believe the scenario of a 0.50% rate hike at or by conclusion of the upcoming March Fed meeting has become an increasingly higher probability, as the Fed is behind the curve on fighting inflation due to an overemphasis on job growth and misjudgment that inflation would be transitory during the past year.
  • In addition to rate hikes, we also believe the Fed will soon announce plans to begin reducing its nearly $9 trillion balance sheet of Treasury bonds and mortgage-backed securities holdings. Such plans by the Fed to reduce bond holdings could amount to approximately $1 trillion annually for the next two or three years, which would also address the further end of the yield curve. Although longer-term rates have risen considerably since last summer, we believe there is likely more to follow as the 10-year Treasury yield could challenge 2.50% by year end.
  • Higher inflation combined with the escalating numbers of COVID-19 cases during January could impact short-term economic momentum. Currently, the Atlanta Fed is tracking 1Q GDP at only 0.7% growth through February 10. However, we believe given what now looks to be dramatically lower COVID case trends over the past month and what could be mitigating inflation during the summer and autumn months, the economy could be shaping up to resume 3% plus economic growth in 2H 2022 and into CY 2023.  

We believe investors should brace for more volatility in the months ahead in the equity and credit markets as the inflationary and interest rate environment continues to play out. However, in our judgment, the economy could be setting up for large pent-up consumer demand in 2H 2022 and CY 2023 as declining COVID-19 cases potentially shift the virus from pandemic to endemic status, and the prospect of inflation eventually mitigates toward a 3% handle. Therefore, as such, stock and credit investors may find themselves well rewarded for staying the course during the months ahead.         


Investments are subject to market risk, including the loss of principal. Asset classes or investment strategies described may not be suitable for all investors.

Past performance does not guarantee future results. Indexes are unmanaged and an investor cannot invest directly in an index.

Equities are subject to market risk meaning that stock prices in general may decline over short or extended periods of time.

Fixed income investing is subject to credit rate risk, interest rate risk, and inflation risk. Credit risk is the risk that the issuer of a bond won’t meet their payments. Inflation risk is the risk that inflation could outpace a bond’s interest income. Interest rate risk is the risk that fluctuations in interest rates will affect the price of a bond. Investing in floating rate loans may be subject to greater volatility and increased risks.

Growth stocks typically are particularly sensitive to market movements and may involve larger price swings because their market prices tend to reflect future expectations. Growth stocks as a group may be out of favor and underperform the overall equity market for a long period of time, for example, while the market favors “value” stocks. Value investing carries the risk that the market will not recognize a security’s intrinsic value for a long time or that an undervalued stock is actually appropriately priced.

Investments in global/international markets involve risks not associated with U.S. markets, such as currency fluctuations, adverse social and political developments, and the relatively small size and lesser liquidity of some markets. These risks may be greater in emerging markets.

The COVID-19 pandemic has caused substantial market disruption and dislocation around the world including the U.S. Economies and financial markets throughout the world are increasingly interconnected. Economic, financial, or political events, trading and tariff arrangements, terrorism, technology and data interruptions, natural disasters, and other circumstances in one or more countries or regions could be highly disruptive to, and have profound impacts on, global economies or markets.

The information included in this document should not be construed as investment advice or a recommendation for the purchase or sale of any security. This material contains general information only on investment matters; it should not be considered as a comprehensive statement on any matter and should not be relied upon as such. The information does not take into account any investor’s investment objectives, particular needs, or financial situation. The value of any investment may fluctuate. This information has been developed by Transamerica Asset Management, Inc. and may incorporate third-party data, text, images, and other content to be deemed reliable.

Comments and general market-related projections are based on information available at the time of writing and believed to be accurate; are for informational purposes only, are not intended as individual or specific advice, may not represent the opinions of the entire firm, and may not be relied upon for future investing. Investors are advised to consult with their investment professional about their specific financial needs and goals before making any investment decisions.

Transamerica Asset Management, Inc. is an SEC-registered investment adviser. The funds advised and sponsored by Transamerica Asset Management, Inc. include Transamerica Funds, Transamerica Series Trust and DeltaShares® exchange-traded funds. Transamerica Asset Management, Inc., is an indirect wholly owned subsidiary of Aegon N.V., an international life insurance, pension, and asset management company. 1801 California Street, Denver, CO 80202, USA.