Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

If markets have a guardian angel right now, it’s probably the world’s central banks and the US Federal Reserve in particular.

Once again this morning, soothing words from the Fed appear to have bolstered shares and the FTSE 100 has joined markets from around the world in rising on Monday - about 2% at time of writing.

That helped them regain ground lost last week, as the relentlessly depressing news on Coronavirus threatened to force a new leg down for markets. As it was, an interview with Fed Chairman Jay Powell with 60 Minutes this weekend helped put a spring back in investors’ step.

Asked to give reassurance in the face of already-huge job losses and a collapse in growth, Powell said: "But I would just say this. In the long run, and even in the medium run, you wouldn't want to bet against the American economy."

He went on to explain that the Fed has still yet more support to give the US economy - which in reality means the global economy as well - if it is needed. Bond buying, an interest cut and direct support for workers via higher unemployment benefits and loans can be added to. What’s more, there appears the will to do it across the branches of government - even from Senate Republicans who would normally bristle at such state largesse.

Help from central banks is what is giving everyone confidence that, whatever the short-term hit from the pandemic, enough businesses and households will be solvent on the other side to force a recovery. The price to be paid in terms of (much) higher government borrowing is something that markets are prepared to look through for now.

This is much better than the alternative, where businesses and individuals are allowed to fail before they can recover. That scenario would likely lead to a genuine depression, given the huge hit to economies from lockdown measures.

There are reasons to be cautious, however. There are good reasons why governments don’t simply print money and handout cheap loans to the private sector all the time. Chief among those is inflation, which is what you normally expect to follow with so much extra money sloshing around, seemingly magicked out of thin air. It’s been a while since the UK has suffered a serious bout of inflation but anyone who remembers the late 80s and prices rising more than 7% a year will tell you how painful it is. Borrowing costs for mortgages get more expensive, the cost of the weekly shop goes through the roof and cash savings begin to lose value.

Part of the reason that we haven’t suffered very high inflation since then is that central banks in leading economies are now regarded as much more independent from their governments. This independence in crucial to financial stability because it reassures markets that there is someone on hand to rein in economies for their own good so that regular crashes or periods of very high inflation are avoided.

Right now, Central Banks can help economies without much fear that prices will rise, because the immediate threat is of recession and a collapse in demand - conditions to keep prices low. Some voices are beginning to question what happens if conditions alter, if demand is successfully maintained and if markets begin to demand a higher return from governments who want to borrow.

In that scenario, investments which include some protection against inflation will be in demand. That includes inflation-linked bonds from governments but may also include some dividend paying shares where the dividend is based on reliably rising earnings.

The ASI Global Inflation-Linked Bond fund specialises in government bonds where the capital to be repaid rises with inflation. The fund features on our Select 50 list of favourite funds.

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

Latest articles

Is this the year for emerging markets?

Are emerging markets still attractive in 2021?


Graham Smith

Graham Smith

Market Commentator

Recession prospects rise after GDP hit

Economic growth and markets levels appear out of whack


Ed Monk

Ed Monk

Fidelity Personal Investing


Toby Sims

Toby Sims

Fidelity Personal Investing