Perspectives Blog

Neutral funds rate going up?

Zach Pandl, Portfolio Manager and Strategist | May 16, 2014

The idea of low neutral funds rate has surprising currency, but could erode with more evidence of solid growth. We believe incoming information suggests the neutral funds rate would be moving higher, not lower. We see neutral funds rate at 3.75-4.00%, which implies an overvalued Treasury market. The hottest topic in the bond market at the moment is the idea that the “neutral funds rate”—where the Fed will rest short-term interest rates when th…

A port in the storm — Short muni funds can offer refuge in the face of rising rates

Catherine Stienstra, Senior Portfolio Manager | October 2, 2014

…tions in place that could anchor interest rates at low levels for some time, namely comparatively lower eurozone rates, dormant wage and price inflation, and intractable geopolitical tensions. That said, economic activity measures reveal continued improvement and recent rhetoric from hawkish Fed members toward altering the “considerable time” language could pave the way for the Fed to hasten its pace toward increases in the federal funds rate soo…

Gaps, not growth

Zach Pandl, Portfolio Manager and Strategist | February 25, 2014

…that we saw in the second half of 2013 remains intact. However, even with modestly slower growth, we think that Fed officials would continue the process of gradually normalizing the stance of policy. The reason is that monetary policy is primarily about “gaps” not growth: the Fed is trying to reduce spare capacity in the economy, not bring about a rapid expansion per se. This is why the Fed’s guidance about the funds rate and the statement on lo…

A question for Jackson Hole

Zach Pandl, Portfolio Manager and Strategist | August 20, 2014

…count for underemployment. For instance, a typical version of the Taylor Rule can be written as: where r is the funds rate, r* is the neutral (nominal) funds rate, U3 and U3* are the standard unemployment rate and its natural rate, π and π*are the inflation rate and the Fed’s inflation target, and the two γ (gamma) terms reflect the responsiveness of policy to unemployment and inflation gaps. In order to account for labor market slack beyond the…

U.S. rates — Data dependence

Zach Pandl, Portfolio Manager and Strategist | June 23, 2014

…ominate the committee. We disagree, and thought the critical part of the June FOMC meeting was the fact that the funds rate outlook once again responded to the decline in the unemployment rate. This evidence of data dependence suggests the period of shifting goalposts is ending. In Exhibits 2 and 3 we show the committee’s central tendency forecasts for the year-end unemployment rate and fed funds rate at the time of each FOMC meeting. Until this…

U.S. rates – Headwinds

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

…to normal. At this week’s meeting the FOMC looks likely to rework its forward guidance for short-term interest rates once again. By our count this will be the seventh variation since the funds rate reached zero (the previous six being “some time”, “extended period”, “mid-2013”, “late 2014”, “mid-2015” and the current 6.5% unemployment threshold). All signs suggest that Fed officials favor replacing the current threshold-based forward guidance w…

What investors should know about Fed forward guidance

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

…r’s guidance is backed up by a very strong form of commitment: quantitative easing (QE). Investors know that the Fed will not raise rates while they are still expanding the balance sheet. Plus, public communication from Fed officials suggests low odds that the pace of tapering ($10 billion per meeting) will either speed up or slow down. We can therefore be reasonably confident that QE will continue—and the funds rate will remain at zero—for most…