Could Higher for Longer Be Even Longer Than We Think?

What does higher for longer really mean? Investors have faced an inflation storyline for almost four years now since the global pandemic threw supply chains into chaos. Entering 2024, markets hoped that inflation had finally been tamed. The economy has remained hot, however, with the last few percentage points of inflation getting very sticky.

See more: How Active ETF TCHP Has Outperformed the S&P 500 YTD

So, from several rate cuts entering the year, the question investors now face is not just how long inflation will stick but whether it could reignite. T. Rowe Price head of global fixed income, Arif Husain, recently assessed the market outlook on inflation. To Husain, inflation may come down further, but it may yet reaccelerate.

Husain points out a few risks that could potentially reaccelerate inflation. For starters, Husain argues that AI, though a “productivity miracle,” may add shorter-term labor costs. While AI can benefit a wide range of sectors, its wide adoption would also create widespread adoption costs.

China, too, plays a role in Husain’s reading. The country’s falling domestic demand has helped its exports remain cheaper for foreign markets. Increased demand from an economic revival in China could push prices up globally, too.

Higher for longer, then, starts to look like more than just a few more Fed meetings into the future. Higher for longer could mean years of moderate but sticky inflation. So, how should investors react?

Active investing can provide one strong option. The right active ETF can adapt to a big swing in market expectations vs. reality. At the same time, active ETFs that take a deeper look at individual firms with fundamental research can find those companies best positioned for higher for longer.

Investors who are concerned about the impact of inflation on interest rates could look to equity-derived yield instead. High quality dividend-focused equities may provide some degree of ballast against rate uncertainty. The T. Rowe Price Dividend Growth ETF (TDVG) presents one option. The ETF charges 50 basis points (bps). It actively invests in stocks with strong current dividend yield, potential for dividend growth, healthy balance sheets, and more.

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