Various US Federal Reserve officials have been making speeches in the last few days in an attempt to calm market jitters following the June FOMC meeting and the markets expectation of an imminent end to the Feds asset purchase program.
The Dallas Fed
President Richard Fisher went so far as to label market participants, who have
pushed bond yields sharply higher, as “feral hogs”. I vastly prefer former NZ Prime Minister
David Lange’s kinder, gentler reference to “reef fish”. Other speeches from the likes of Bill Dudley
(New York Fed) and Dennis Lockhart (Atlanta Fed) were tamer by comparison but
made highly pertinent points.
In particular from
Dudley: “If labor market conditions and the economy’s growth momentum were to
be less favourable than in the FOMC’s outlook – and this is what has happened
in recent years – I would expect that the asset purchases would continue at a
higher rate for longer”.
The fact of the matter
is it’s by no means certain the Fed will start to reduce the pace of its asset
purchase program soon. As I said
following the FOMC meeting the hurdle to tapering is high. While we agree with the Fed that US growth
will be higher in the second half of this year, our forecasts aren’t as high as
theirs. Furthermore, while we think
employment growth continues, we were intrigued by the blip higher in the
participation rate in May which contributed to a RISE in the unemployment rate. Friday’s June labour market report will be
fascinating. And perhaps most
importantly, there is no sign yet that the recent drop in inflation is indeed due
to “transitory influences”. The annual
rate of PCE inflation was unchanged at 1.1% in May.
What we have seen
in the last few days is interest rate markets anticipating the end of QE. While it’s reasonable for markets to
anticipate events, we agree with the argument that markets have got somewhat
ahead of themselves.
On the other hand,
I like the fact that the move higher in interest rates is reflected in higher
real yields. That means that rather than
an igniting of inflation fears, we are seeing a normalisation of expectations
for monetary policy and with that, economic growth. In that respect interest rates are actually
rising for the right reasons.