Perspectives Blog

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…

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…

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…

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…

Release the doves

Marie M. Schofield, CFA, Chief Economist and Senior Portfolio Manager | October 20, 2014

…concerned there may be some larger shortfall in demand next year for some reason we do not yet know. While the Federal Reserve (the Fed) remains highly focused on achieving its mandate for growth, of equal importance is achieving its mandate for 2% inflation and overall price stability. On both, it is still some ways away. As a result, the Fed (and all central banks) is highly sensitive to shifts in inflation expectations by either consumers or…