For Robert Tipp, Chief Investment Strategist and Head of Global Bonds at PGIM Fixed Income, an appreciation for financial market history matters. And in today’s fast moving environment, in which market prices are rapidly adjusting to expectations of Fed policy changes, Robert’s perspectives are especially relevant. Our discussion is a review of inflation and monetary policy cycles from many years prior and through this, Robert shares his insights on the drivers of inflation. Calling into question a very basic assumption, that nominal interest rates are highly connected to inflation risk premium, Robert points to the importance of demographics and the availability of capital in setting the risk-free rate. Thus, today’s longer dated Treasury yields, well below concurrent inflation, are in part due to the excess of capital looking for a home, hoping to lock in some return over a longer time frame.

Through our conversation, we also learn of Robert’s views on Central Bank communication, contrasting the Greenspan era of “constructive ambiguity” with Powell’s focus on transparency. In this context, Robert sees some components of the emphasis on messaging as positive, and others, including “time dependent” forward guidance as recently abandoned by Australia as less effective. Lastly, we consider the implications of higher rates moves on the stability of the ecosystem of asset prices. Here, Robert cautions that the transition to a higher rate environment may lead to large shifts, micro flash crashes and a breakdown in liquidity with respect to the flow that wants to move.

I hope you enjoy this episode of the Alpha Exchange, my conversation with Robert Tipp.