Perspectives Blog

Does a perfect policy portfolio exist?

Jeffrey Knight, CFA, Global Head of Investment Solutions and Asset Allocation | May 5, 2014

…(upper right), all equity (lower right), and capital preservation (lower left). In other words, we think that a policy function that rotates among four distinct policy portfolios corresponding to each quadrant is closer to perfect than any single policy portfolio. This distinction matters today, we think. An extended episode of extreme monetary easing has created very low bond yields worldwide and has wrought an intentional inflation in risky as…

ECB asset purchases — Bazooka or damp squib?

Martin Harvey, Fund Manager, Threadneedle International Ltd | September 22, 2014

…rnment bonds. Comments made since the September meeting suggest that there are still significant hurdles to this policy. Vice President Constancio sums it up best: “We are convinced that we are allowed to buy government bonds in the secondary market, if it is justified by monetary policy considerations. But we also know what it means and this is certainly something we would prefer not to be forced to do.” This re-enforces the idea that the ECB wi…

U.S. rates – Headwinds

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

…nds vague, but we think Fed officials actually have a specific issue in mind: the right way to determine whether monetary policy is easy or tight. The diagram below illustrates the basic point. Monetary policy responds to the output gap (the reaction function) and also affects the size of the output gap (the normal transmission mechanism). However, there are many other things that affect the output gap besides monetary policy. These can include n…

U.S. rates — Data dependence

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

…ve reacted more to recent news. But we saw enough evidence of data dependence yesterday to remain convinced that policy will turn more hawkish as inflation and unemployment gaps close. Central bankers often say that policy is “data dependent”, but it’s not immediately clear what they mean by that phrase. One should hope that at some level monetary policy always depends on the outlook for the economy, so emphasizing data dependence can seem like s…

What investors should know about Fed forward guidance

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

…nce between commitments and forecasts. But in general, commitments are more difficult to reverse, either because policymakers’ credibility is on the line or because of institutional details of the policy framework. Statements that contain explicit commitments are more credible and should be taken more seriously by investors. Forward guidance based on forecasts alone (“we think we will raise rates next year because we forecast that inflation will…

A question for Jackson Hole

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

…he merits of this argument (see here for our views), one important question remains unresolved: how exactly will policymakers adjust the funds rate and balance sheet in light of this additional labor market slack? Fed officials have stressed the underemployment problem, but have offered few details about how it affects the policy outlook—instead, they’ve tied the exit discussion to the notion of “headwinds” (background here). This year’s Jackson…

U.S. rates – Forward guidance taxonomy

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

…not a black and white difference here. But in general, commitments are more difficult to reverse, either because policymakers’ credibility is on the line or because of institutional details of the policy framework. Statements that contain explicit commitments are more credible and should be taken more seriously by investors. Forward guidance based on forecasts alone (“we think we will raise rates next year because we forecast that inflation will…