Perspectives Blog

U.S. rates — Data dependence

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

Evidence of data dependency at the June FOMC meeting suggests policy will respond to unemployment and inflation surprises. We are more confident the Fed’s reaction function is (nearly) done moving. We therefore remain cautious about exposure to U.S. interest rate risk, especially at the middle of the yield curve. The June FOMC meeting contained a little bit for everyone and interest rates reacted only marginally after the announcements. But lo…

Yellen at Jackson Hole

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

…offered a balanced assessment of labor market conditions that suggests her views are closer to the center of the FOMC than we previously had thought, and notably different from the most dovish FOMC members (e.g. Minneapolis Fed President Narayana Kocherlakota) as well as outside observers with similar ideological stripes (e.g. monetary economist Adam Posen). Indeed, her comments were starkly different in tone than her speech on labor markets in M…

A creature is stirring

Zach Pandl, Portfolio Manager and Strategist | December 8, 2014

…iety of reasons we still believe the first rate hike will be slightly later than that (arriving at the June 2015 FOMC meeting), but the projections nonetheless highlight that standard policy rules envision the Fed beginning its exit in the very near future. Exhibit 2: Updated “optimal control” calls for rate hikes in Q1 2015 What does all this mean for the upcoming FOMC meeting? In our view, it means that the “considerable time” language—which h…

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

…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 they begin, and (3) that short-term rates could remain below pre-crisis levels even when the economy returns 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 th…

U.S. rates — View update

Zach Pandl, Portfolio Manager and Strategist | April 4, 2014

…in the Fed’s own forecasts for the federal funds rate (these are the so-called “dots”, named after the chart the FOMC publishes showing the forecasts, below). The focus on these forecasts has not seemed to change despite meaningful revisions at the last FOMC meeting. As we have explained before (see here), the credibility of the Fed’s guidance beyond 2014 should be considered low, and should not alone be used to value the front-end of the yield c…

U.S. rates – Forward guidance taxonomy

Zach Pandl, Portfolio Manager and Strategist | March 17, 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 statements with some type of commitment. Current statements for 2015 and beyond are closer to the weakest type of forward guidance, a forecast that the central bank will behave in the future differently than it has behaved in the past. Look for the market’s heavy reliance on the SEP forecasts to fade o…