Tags: Rosenberg | stagflation | interest | rates

David Rosenberg: Stagflation, Higher Interest Rates Coming

By Dan Weil   |   Wednesday, 11 Sep 2013 08:28 AM

The Federal Reserve will succeed in its effort to boost inflation, leaving the economy with stagflation, says David Rosenberg, chief economist and strategist at Canadian wealth management firm Gluskin Sheff + Associates.

He also predicts that interest rates will rise.

"It seems [Fed Chairman] Ben Bernanke's legacy will not just be that he saved the world from financial calamity five years ago. He is also likely to bequeath stagflation, or at least a mild form of it," Rosenberg writes in the Financial Times.

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"It is not possible to keep real short-term interest rates negative for this long in the face of even modestly positive real economic growth without generating financial imbalances and inflationary excesses down the road."

The Fed has indicated it would like to see inflation at 2.5 percent, Rosenberg says. "It would be an exercise in futility to bet against that desire."

Strangely enough, while Rosenberg warns of coming stagflation, he also believes the U.S. economy "is likely to do better in 2014."

That economic growth and inflation should push interest rates higher, he explains. "The lows in Treasury yields are behind us, and a secular bear market is now in its infancy."

For investors, "do not spend too long debating whether you should be starting to hedge your portfolio against the prospect of a rising long-term interest rate environment, even as central banks continue to keep short-term policy yields at the floor," he states.

"It is time to start hedging against rising long-term interest rates."

St. Louis Fed President James Bullard also sees inflation rising and is pleased about it.

After news last month of a 0.2 percent gain in July consumer prices, he told reporters, "to the extent that you have got higher inflation numbers in this report, that would be bolstering the notion that inflation would be naturally moving back toward target in the coming months and quarters," Reuters reports.

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