Leave it to Axel Weber to sound the inflation alarm while most of the world is focused on the threat of deflation.
A stalwart advocate of tight money at the European Central Bank, where he helped to set interest rates from 2004 to 2011, Weber says U.S. price gains and the subsequent response of the Federal Reserve will outpace investor expectations.
“I see more potential ahead for nervousness in the market,” Weber, chairman of UBS AG since 2012, told a London conference of the Institute of International Finance yesterday. “The whole driver is going to be the inflation rate by the end of the year in the U.S.”
The boss’s concerns are shared inside Switzerland’s largest bank. In a May 27 study, New York-based economist Maury Harris and colleagues outlined what they called a non-consensus view that the personal consumption expenditures price index excluding fuel and food will reach 2 percent by the end of this year. It rose 1.4 percent in April.
The Fed’s benchmark rate will jump to 1.25 percent by the end of next year and 3.25 by the end of 2016, UBS predicts. By contrast, the median estimate of economists in a May survey was for a 0.75 percent rate by the end of next year.
The UBS analysis points to tightening labor and rental markets, a less-disinflationary impact from imports and price gains at the factory gate.
Such an environment sets the stage for a surge in bond yields by the end of the year, forcing the Fed to retreat from its low-interest rate commitment, in UBS’s view. The 10-year Treasury yield will rise to 3.25 percent in December from 2.57 percent today and touch 4 percent by the end of 2015, it says.
That would surprise many, with the median forecast of analysts in another Bloomberg poll suggesting the yield will be 3.14 percent in the fourth quarter of this year.
A year since emerging markets were roiled by the fear the U.S. central bank was readying to withdraw stimulus, Weber now says investors worldwide must brace themselves anew for international fallout from the Fed.
“Every U.S. tightening cycle has been associated with repercussions in the global economy,” he said. “I don’t have the hope it will be different this time around.”