As expected, the Fed did not change policy at its meeting last week, as the “dot plot” shifted downward – closer to, if still well above, the levels priced into the market. In the press conference, Fed Chairman Janet Yellen emphasized that expectations were for a slow and shallow pace of rate hikes. When asked also about the risks of a “tightening tantrum,” the essence of her answer was: we’re communicating our intentions…market volatility is not our problem.
Also in the press conference, Yellen was asked about calls on the Fed from the IMF and World Bank (both of whom appear to fear capital market turbulence and capital flight from emerging market economies more than a U.S. recession) to wait. In essence, her answer was: ‘not my job:’
- “With respect to international spillovers, this is something that we have been long attentive to. We have to put in place a policy that is appropriate to evolving conditions in the U.S. economy but we can’t promise that there will not be volatility when we make a decision to raise rates.”
In this month’s CIO Letter we offer our analysis of the broader implications of our world view (sub-par growth with multiple volatility fertilizers), focusing on the financial sector and investment policies. Continue reading
No Greek deal was announced, but the can was kicked down the road for a few weeks. Bond yields rose globally; comments by key leaders didn’t calm the markets. ECB President Mario Draghi reaffirmed the organization’s commitment to quantitative easing (QE), but said markets “should get used to periods of higher volatility,” disappointing those who expected him to talk rates down. The IMF suggestion that the Fed hold off on rate hikes to defer the risk of a possible “bout of financial instability” didn’t calm the market either.
Greece Watch: No Default Before Month-End
- Greece announced it would bundle all payments on the €1.6 billion due to the IMF in June and pay at the end of the month (June 30). €300 million had been due June 5. This does not signify real progress in the negotiations: it simply gives the parties a few more weeks to continue negotiating before time finally runs out.
- June 30 looks like a pretty hard deadline: it’s hard to envision how they can kick the can beyond then without a longer-term deal.
Nonfarm payrolls came in above expectations last week as they rose by 280k. The prior months were revised up by 32k. The news jolted the bond market, pushing yields higher (see my recent post for more details on the markets). Initial unemployment claims ticked down to 276k.
- Rising hourly incomes suggest inflationary pressures are building as the labor market tightens.
- The rising employment and labor force participation rates suggest the labor market healing process continues and that non-inflationary growth can continue because the “shadow inventory” of labor force dropouts is becoming re-engaged.
If The Fed Chair Speaks Late On a Friday Afternoon Before a Long Weekend, Investors Should Still Listen
If the economy continues to improve as expected, the first hike will come in 2015: “It will be appropriate at some point this year to take the initial step to raise the federal funds rate target and begin the process of normalizing monetary policy.” Pay little heed to the Q1 slowdown…unless there is no Q2 bounce. The “apparent slowdown was largely the result of a variety of transitory factors.” The Federal Open Market Committee (FOMC) “must take policy in a forward-looking manner” or “risk overheating the economy.”