Tagged: interest rates

The Day the Fed fired the starting gun

After several months of teasing the market, the Fed finally delivered its taper. A week before Christmas, this was a punchy move. The message was clear too. In his response to the first question, Bernanke reiterated this key line from the statement: [If the data turns out as well as expected], ‘the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings’. Every time he was asked whether they might take the tapering back, Bernanke didn’t take the bait. Of course they will be flexible, he said, but let’s see how this goes first.


Equity markets seem happy to hear the economy is recovering; that the event risk over a taper has been removed without (yet) causing yields to spike. But make no mistake, this was a hawkish meeting:
– They didn’t change the 6.5% unemployment threshold. Sure, they added they’d wait until they were “well past” that level before hiking, but Fed speakers have been emphasising “threshold not trigger” since September anyway
– They didn’t add an inflation floor
– They didn’t cut the IOER
– They didn’t slash their inflation forecasts
– They did cut their unemployment forecasts – the biggest change being 2014 at 6.3%-6.6% from 6.4-6.8
– Although the median Fed voter sees 2016 rates at 1.75% from 2%, the dispersion saw some voters go for higher rates
– Although one more voter sees rates rising first not until 2016, there are still 2 who see rates rising in 2014
So two members of the board can see, now, that rates could go up within 12 months. With interest rates having been zero  for 5 years, and “lower for longer” the central bank mantra for the whole of that period, it’s easy to be lulled into thinking cheap money will be around forever. Central banks don’t want you to panic as they try to normalise. The question is, do we think the taper tantrum of June this year was just a bad dream? Or was that the moment when we started to wake up?
The rally in the dollar, and rise in US rates, suggests those markets are indeed waking up. Equities have form in lagging – after money markets froze in the summer of 2007 they rallied for another 3 months before noticing. Data will be key – not just employment now but inflation, which has hit a softer patch of late. Get ready for 2014: the year when the global economy walks out the hospital unaided and stumbles to the sunlit uplands.

The Day Today 3 Sept

* RBA keep rates unch at 2.5% but omit the phrase “inflation outlook could provide some scope to ease policy further”. AUD rallied 50pts as this considered ‘not dovish’ although better to say it’s neutral ahead of the general election

* AUD retail sales +0.1% MoM vs +0.4% exp and flat prior

* AUD C/A wider at -9.4Bn vs -8.5bn exp and -8.7bn prior

* Japan monetary base +42%, cash earnings +0.4% shows Abenomics working

* Amari: Abe wants to see Tankan before making sales tax decision {NSN MSJF4F1A1I4I <go>}

* Nikkei: BOJ Mulls Upgrading Economic Assessment http://s.nikkei.com/14mE3ew

* UK retail sales +1.8% YoY vs +2.4% exp and 2.2% prior

* SCMP: Shanghai free-trade zone to launch later this month http://bit.ly/174M1fq

* Microsoft to buy Nokia’s mobile phone unit in all cash Eur 5.44bn deal; will use overseas cash resources to fund it {NSN MSJFX46JTSFL <go>}

Just a minute

Ah, the Fed Minutes. If only they contained no Repetition, Hesitation, or Deviation, we’d be able to see the wood for the trees. For all the worry over September tapering, we know they want to withdraw monetary accommodation. It’s not even about when. It’s about what it means after that. The two main takeaways from the Minutes were:

1)  ‘Several’ committee members ‘expressed confidence’ about the recovery. So that’s the majority, then. Even the minority who want to wait and see don’t doubt things are picking up.

2) However, they discussed ‘the potential for clarifying or strengthening… forward guidance’: ‘several participants were willing to contemplate lowering the unemployment threshold if additional accommodation were to become necessary’.

So, they don’t want rates to go up. This is why the period after tapering is more important than when they start. Once it begins, will the Fed really be able to persuade the market that it is NOT the thin end of the wedge?

Oh, forward guidance. Credibility is so key. Memo to new Fed chair – Remember: No Repetition, Hesitation, or Deviation…

The more we hear, the less we know

Mark Carney’s first Treasury Select Committee hearing earlier this year was remarkable for one thing: his obsession with communication. The success of the Bank of Canada’s so-called ‘contingent commitment’ was taken up with aplomb by the Fed, and now Carney brings it to the BoE with ‘forward guidance’. Even the ECB want to join the party.

They should be wary. Last night’s Fed statement has been pored over for exactly what the inflation/unemployment targets mean – does disinflation dominate? How more dovish is “modest” than “moderate”? We might know that Esther George is less dovish than James Bullard, but what does dovish even mean these days? Taper later:? Taper then reverse? Butcher, baker, candlestick maker? We’ve gone from gnomic Greenspan to verbal diarrhoea Bernanke, and are none the wiser.

The trouble in this information age is that the more we read, the more confused we become. Instead of stepping back and trusting our judgement, we dive in further in a desperate bid to find the silver bullet of a detail.

It’s time to stop listening to the central bankers, and take a view on the data. I know, it’s tough to believe the world might be recovering. But it is. Sure, it’s not going in a straight line, but even European growth is picking up (check out those PMIs). As Frankie says, Relax.