The US Federal Reserve should not be tempted to overreact as it seeks to tackle rising inflation, says Cindy Beaulieu, CIO of Conning North America, on the latest episode of Credit Exchange with Lisa Lee. A combination of rising energy prices and the lingering after-effects of the Trump administration’s tariffs agenda mean inflation continues to be a key issue for the economy. For Beaulieu, Fed Chair Kevin Warsh’s recent speech at Jackson Hole highlighted a focus on rising core personal consumption expenditures (PCE) remaining at an elevated level, and the need to address it as a priority. However, she believes the Fed should tackle the issue cautiously. “Our thought is there’s a lot of noise [in the data], so be careful,” she says. “Don’t overreact, because overreaction could stifle the economy in a way of unintended consequences and actually cause a recession, which is certainly not what they want to do. “Being patient would really put them (the Fed) in a much better position.” She suggests that secular changes in the nature of the economy, such as an ageing population, deglobalisation, and a much riskier global geopolitical environment, mean that the Fed’s long-held 2% inflation target may no longer be achievable. While Beaulieu believes that the transformative potential of AI across the economy is very real, she notes that “the last thing” you want to have is a portfolio that is overly-concentrated on the AI trade. “I think some of the things that are really important... is first understanding exactly who the borrower is, where they sit, and what type of legal protections you have should things go in the wrong direction,” she says. “There’s been a lot of issuance in the structured markets, and not every one of those deals is created equal. Some of those leases are much more favourable for the companies that are going to occupy the data centre, than they are for the lenders to that particular facility. So you have to be very, very careful as you are pursuing this trade.” For Conning, an asset manager focused on the insurance industry with over USD 190bn in AUM, a key focus of the credit cycle since COVID has been ensuring their portfolios are positioned neutral to the duration they need to be for the liabilities of their various insurance clients. “We’ve invested... across the investment-grade areas of the market, but we have been a little bit less focused on the below-investment-grade parts of the market now for a couple of years,” Beaulieu says. “We have given up a little bit of return in that, but we are also about protecting principal, and so we’re willing to give up a little bit of that incremental return.” She says Conning’s focus, especially for the last 18 months, has been on the structured areas of the fixed income market. That has included investments in agency and non-agency mortgages, esoteric asset-backed securities, high-quality CLOs, and private placements. She also discusses the shifting outlook for the upcoming US mid-term elections, recent regulatory developments in the insurance sector, and dynamics in the labour market.
