Perspectives Blog

U.S. rates – Headwinds

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

…way, monetary policy may not be exceptionally easy today (though we will take up that issue below). Rather, the Fed’s stance could be thought of as the mirror image of the constraints on growth from other sources: tax increases, underwater mortgages, impaired securitization markets, etc. To close the output gap, Fed policymakers need to offset these headwinds complicating their job. For economists the term “headwinds” is just a stand-in for a fa…

Flexible income strategies — Avoiding side effects from the Fed’s medicine

David King, CFA, Senior Portfolio Manager | August 11, 2014

…there can be side effects. Persistently low interest rates have put savers under attack. Perhaps this wasn’t the Fed’s intent, but the good people with cash on hand and a limited appetite for risk aren’t having an easy time growing their wealth with 5-year Treasury Notes yielding well under 2%. Free markets have a way of trying to resolve economic imbalances, such as the side effect of current Fed policy. As you read this article, assume that inv…

U.S. rates — Data dependence

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

…f data dependence is so low that policy is effectively on a preset course. An example of the latter would be the Fed’s rate hikes in mid-2006, when the committee was finessing the very end of a tightening cycle and every data point seemed to matter. We think the reason that the sensitivity to incoming data varies over time is related to the practice of gradualism in central banking: the Fed responds only gradually to shocks, so there are times wh…

Dovish feathers showing through

Zach Pandl, Portfolio Manager and Strategist | April 14, 2014

Dovish comments by Fed officials lead us to believe that normalization in interest rates could take a more circuitous route. While the steady economic recovery makes higher yields inevitable, the path we take to get there is dependent on the Yellen Fed’s policy approach. We remain underweight duration, but are now less sure 3-5yr yields will lead the way over the near-term. Textbooks would have us believe that monetary policy is a hard science…

U.S. rates — View update

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

…egative on three key duration fundamentals: 1. The amount of slack in the U.S. economy 2. The credibility of the Fed’s forward guidance (the “dots”) 3. The willingness of Fed officials to overshoot their inflation and financial stability “targets” Taking each of these issues in turn: Slack: Today’s employment report was most notable for favorable supply-side news: although employment showed solid gains, measures of slack were unchanged or worsene…

A question for Jackson Hole

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

Fed officials have highlighted underemployment but offered little guidance about how this issue affects the policy outlook. Traditional tools like the Taylor Rule need to be recalibrated if the central bank focuses on a different measure of slack, so they offer little guidance to investors at the moment. We hope to learn more at this week’s Jackson Hole conference. A consensus among Fed officials holds that the standard U3 unemployment rate—no…

Slack and inflation

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

…ment rate suggests only small amount of labor market slack Unemployment rate (%) Sources: Haver Analytics, BLS, Federal Reserve, Columbia Management Conceptually, the Fed’s working definition of full employment will be related to the risk of overshooting the inflation target. By focusing on narrow measures of labor market slack, Fed officials will run less risk of overshooting on inflation (and some risk of undershooting). By aiming for broader…