Perspectives Blog

What investors should know about Fed forward guidance

Zach Pandl, Portfolio Manager and Strategist | March 24, 2014

The Fed’s communication for 2014 looks like the strongest type of forward guidance, one that clarifies the existing policy approach and backs up its statements. Current statements for 2015 and beyond are closer to the weakest type of forward guidance, which means they should be considered less credible. Look for the market’s heavy reliance on Summary of Economic Projections (SEP) forecasts to fade over time. Last week, at Janet Yellen’s first…

U.S. rates – Waiting for the sound

Zach Pandl, Portfolio Manager and Strategist | May 5, 2014

Latest data showing faster growth and shrinking gaps. Normalizing economy creates asymmetry in monetary policy outlook. Fed officials might need to make a sound before interest rates move higher in more meaningful way. By now it is widely appreciated that gross domestic product (GDP) is a deeply flawed tool for tracking economic growth. But the contrast between the Q1 GDP report and other available data on the economy was nonetheless remarkabl…

U.S. rates — When the facts change

Zach Pandl, Portfolio Manager and Strategist | September 10, 2014

…13 sell-off and (2) less spare capacity in the U.S. economy than commonly believed (see here on valuations; here and here on spare capacity). As a result, we have been concerned about earlier-than-expected rate hikes from the Fed and have remained cautious about the 3- to 5-year point on the Treasury yield curve. Today these facts—decent long-end valuation and an out-of-consensus view on spare capacity—are no longer true, at least to the same deg…

Could tapering be good for stocks?

Fred Copper, Senior Portfolio Manager | December 16, 2013

…of QE is cut (tapered), the market may actually be cheered by the end of what has always been perceived as a temporary and extreme form of life support. Few issues currently cause as much investor angst as the timing of the Fed’s eventual reduction in the pace of quantitative easing, aka tapering. In May, when the Fed first spoke concretely about slowing the rate at which they are buying government and mortgage securities, interest rates around…

U.S. rates – An intriguing six point three

Zach Pandl, Portfolio Manager and Strategist | June 9, 2014

Fed and consensus unemployment forecasts are likely to come down after last week’s jobs report. It is not obvious what lower unemployment rate forecasts mean for U.S. monetary policy. June FOMC meeting should shed light on Fed’s worldview—in particular, whether the U3 unemployment rate still matters. The latest jobs report may look pretty bland on the surface, but I can assure you that it will generate plenty of intrigue among close observers…

U.S. rates – Headwinds

Zach Pandl, Portfolio Manager and Strategist | March 17, 2014

At this week’s meeting, the Federal Open Market Committee looks likely to rework its forward guidance for short-term interest rates once again. We expect revised forward guidance to lean heavily on the idea of “headwinds”; this is a stand-in term for a low equilibrium real rate. We expect that the new guidance will make three main points: (1) that the FOMC is in no hurry to raise rates, (2) that rate hikes can proceed gradually once…

Volatility and Goodhart’s Law

Zach Pandl, Portfolio Manager and Strategist | May 21, 2014

Markets are starting to make understandable inference that Fed officials see a fixed timeline for rate hikes. Implied volatility is low because perceived policy uncertainty is low. We remain focused on modest slack and sturdy growth. Recent Fed communication brings to mind Goodhart’s Law: “When a measure becomes a target, it ceases to be a good measure.” In a speech Tuesday, New York Fed President Dudley noted that Eurodollar futures are prici…