Fed officials: Stagflation fears 'overblown'

NEW YORK, Oct. 18 Reuters - Fed officials told the 2021 Milken Global Conference that "the worries that the U.S. economy is heading towards stagflation are overblown," several high-profile bond market investors said Monday afternoon in the Newsroom.

Stagflation - when stagnant economic activity is combined with high inflation - is extremely unlikely, PIMCO Chief Executive Emmanuel Roman said in a panel discussion at the conference held in Beverly Hills, California.

Other participants in the Panel Discussion – including Martin Flanagan and Guggenheim Partners Chief Investment Officer John Hampson, Inc.; Andrew Payton, Chief Investment Officer for the Employees Retirement System of Hawaii; and David Hunt, Global Director of Company - Guggenheim Partners — largely agreed that the threat of stagflation was remote.

With energy prices in the rise as the economy is forced by supply chain gridlock, an increasing number of investors have started to fret about the threat of stagflation over the last few months.

In the past, a stagflationary environment has tended to weigh on stock performance, analysts at Goldman Sachs said in a report published earlier this month.

The S&P 500' s median real total return fell to 2.1% per quarter over stagflationary periods in the last 60 years compared with an overall median real total return of 2.5% per quarter over that period, the report said.

However, Invesco's Flanagan and the panel's other speakers believe that strong U.S. growth makes the prospect of stagflation unlikely.

Guggenheim's Minerd, who views the recent rise in inflation as temporary, said the current interest rate environment supports stock valuations at current levels.

The S&P 500 Index traded at a forward price to earnings ratio of about 20, close to the two-decade high of 23 touched in early September.

Yes, for sure, Minerd said. We are very much in bubble, but there are a lot of opportunities here for a long-term investor. With the treasuries yielding very little, investors’ reach for better returns is supporting equity markets, PGIM's Hunt said.

It's never been more punitive to hold cash, he said.