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“The [Federal Reserve] wants to be viewed as a conscientious inflation fighter, but the extremely negative real Fed funds rate says otherwise,” writes Richard Bernstein, founder of Richard Bernstein Advisors, in the Financial Times. The “real” Fed funds rate is the difference between the US central bank’s target interest rate and inflation. When it is positive (ie, interest rates are higher than inflation), that should be “enough to slow nominal growth”.

For example, in the early 1980s, under Paul Volcker (pictured below), the last Fed governor to battle severe inflation, the real rate peaked at “more than 10%”. Today, however, with inflation at a 40-year high, “the real Fed funds rate is now negative to a degree... far beyond historic averages” – sitting at negative 7.5% versus a 50-year average of 1%.

The Fed hopes to raise rates enough to curb inflation without causing a recession. However, it’s also possible that we get neither a “soft” nor a “hard” landing, but instead that the Fed fails to cool the economy at all and inflation stays “high for some time” – and markets seem to be underestimating this possibility, which represents opportunity. Some traditional inflation hedges such as inflation-linked US government debt and real estate investment trusts have attracted attention, but “investors remain broadly underweight assets that benefit the most from inflation”, including energy, gold, cyclical stocks, commodity-reliant countries and assets such as timber land and farm land.