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20-06-2015, 03:03 PM
Market warns: US not strong enough
918 words
20 Jun 2015
The Australian Financial Review
AFNR
English
Copyright 2015. Fairfax Media Management Pty Limited.
Is the US central bank like an invalid desperate to prove that it is able to finally quit the sick bed, even though doctors warn that the effort could cause a relapse?
That's the view of many market players, including the legendary bond investor Bill Gross, who last September abruptly left giant bond fund manager PIMCO (a firm he co-founded in 1971) to join its competitor Janus Capital.
In the Barron's 2015 midyear roundtable, Gross argues that the US Federal Reserve "will bump up its interest rate target" this year, most likely in September or December.
The Fed, he says, "wants to prove that, like a sick patient, it can get out of bed and stand up".
Gross points out that by keeping US interest rates close to zero since 2008, the US central bank has created problems for major parts of the financial system.
"Zero interest rates are nice for borrowers, but they have a negative effect on pension funds, insurance companies and liability-based financial organisations," he says.
Certainly, US central bank head Janet Yellen appears to be continuing to lay the groundwork for a rise in short-term US interest rates as soon as September.
Speaking after a meeting of the US central bank's key interest rate committee, Yellen was at pains to stress that policymakers wanted to see more "decisive" evidence of a strengthening economic recovery before raising interest rates, and emphasised that rate rises would be gradual.
All the same, she noted that if US economic activity picked up in the second half of the year and the US jobs market continued to strengthen, "an increase this year is possible".
The US central bank's deputy head, Stanley Fischer, has made little secret of the Fed's desire to return to a more normal interest rate policy.
"Beginning the normalisation of policy will be a significant step towards the restoration of the economy's normal dynamics, allowing monetary policy to respond to shocks without recourse to unconventional tools," he noted in a speech in New York in March. He reminded his audience that the path back to normal interest rates would be a long one, and there was no reason for investors to be unduly concerned because US monetary policy would continue to be supportive.
"When we raise the interest rate," he said, "we will be moving from an ultra-expansionary monetary policy to an extremely expansionary monetary policy."
For her part, Yellen also appeared to be steeling herself for a possible outbreak of market volatility when the Fed raises interest rates, despite her painstaking efforts to prepare investors for such an eventuality.
"It is hard to have great confidence in predicting what the market reaction will be to Fed decisions and there have been surprises in the past," she said this week.
Yellen also concedes the US central bank had erred in not raising rates faster in the early 2000s. "With the benefit of hindsight, it might have been better to raise rates more rapidly or more during the 2004 to 2006 cycle," she said.
By raising interest rates, the US central bank would appease critics who argue that by keeping interest rates artificially low for so long, the bank has pushed investors into making highly risky investments, which has pushed valuations in global equity and bond markets to extreme levels.
But it would put the US central bank at odds with the International Monetary Fund, which earlier this month urged the Fed to wait until next year to raise short-term interest rates.
In its annual review of the US economy, the IMF argued that the Fed could be forced into an embarrassing reversal of monetary policy if it cut rates prematurely.
"Raising rates too soon could trigger a greater than expected tightening of financial conditions or a bout of financial instability, causing the economy to stall," the IMF report said. "This would likely force the Fed to reverse direction, moving rates back down towards zero with potential costs to credibility."
Investors worry that US interest rate rises are likely to reverberate through the global economy, as money is pulled out of emerging markets and used to buy higher-yielding US assets. A Fed rate rise could also push the US dollar sharply higher, hitting borrowers in emerging markets that have large US dollar-denominated debts.
But while most investors are resigned to a US interest rate rise in September or December, some - such as high-profile US bond trader Jeffrey Gundlach, who heads the bond firm DoubleLine Capital - believe the patient is still far to weak to quit the sick bed.
Speaking to investors on a conference call earlier this month, Gundlach predicted that relatively anaemic growth and low inflation meant the Fed would take longer to raise rates than the consensus is expecting. (The weakness in the US economy in the first quarter has caused the Fed to cut back its 2015 growth forecast to 1.8 to 2 per cent, from 2.3 to 2.7 per cent previously.)
And he offered an interesting explanation for the Fed's continued warnings to investors that higher rates were on the way.
"I'm wondering why the Fed is so interested in talking about raising interest rates," he said. "My conclusion is they just don't want to be at zero. When the next economic weakness comes, it's a real problem if the Fed is at zero."
Fairfax Media Management Pty Limited
Document AFNR000020150619eb6k0002a
918 words
20 Jun 2015
The Australian Financial Review
AFNR
English
Copyright 2015. Fairfax Media Management Pty Limited.
Is the US central bank like an invalid desperate to prove that it is able to finally quit the sick bed, even though doctors warn that the effort could cause a relapse?
That's the view of many market players, including the legendary bond investor Bill Gross, who last September abruptly left giant bond fund manager PIMCO (a firm he co-founded in 1971) to join its competitor Janus Capital.
In the Barron's 2015 midyear roundtable, Gross argues that the US Federal Reserve "will bump up its interest rate target" this year, most likely in September or December.
The Fed, he says, "wants to prove that, like a sick patient, it can get out of bed and stand up".
Gross points out that by keeping US interest rates close to zero since 2008, the US central bank has created problems for major parts of the financial system.
"Zero interest rates are nice for borrowers, but they have a negative effect on pension funds, insurance companies and liability-based financial organisations," he says.
Certainly, US central bank head Janet Yellen appears to be continuing to lay the groundwork for a rise in short-term US interest rates as soon as September.
Speaking after a meeting of the US central bank's key interest rate committee, Yellen was at pains to stress that policymakers wanted to see more "decisive" evidence of a strengthening economic recovery before raising interest rates, and emphasised that rate rises would be gradual.
All the same, she noted that if US economic activity picked up in the second half of the year and the US jobs market continued to strengthen, "an increase this year is possible".
The US central bank's deputy head, Stanley Fischer, has made little secret of the Fed's desire to return to a more normal interest rate policy.
"Beginning the normalisation of policy will be a significant step towards the restoration of the economy's normal dynamics, allowing monetary policy to respond to shocks without recourse to unconventional tools," he noted in a speech in New York in March. He reminded his audience that the path back to normal interest rates would be a long one, and there was no reason for investors to be unduly concerned because US monetary policy would continue to be supportive.
"When we raise the interest rate," he said, "we will be moving from an ultra-expansionary monetary policy to an extremely expansionary monetary policy."
For her part, Yellen also appeared to be steeling herself for a possible outbreak of market volatility when the Fed raises interest rates, despite her painstaking efforts to prepare investors for such an eventuality.
"It is hard to have great confidence in predicting what the market reaction will be to Fed decisions and there have been surprises in the past," she said this week.
Yellen also concedes the US central bank had erred in not raising rates faster in the early 2000s. "With the benefit of hindsight, it might have been better to raise rates more rapidly or more during the 2004 to 2006 cycle," she said.
By raising interest rates, the US central bank would appease critics who argue that by keeping interest rates artificially low for so long, the bank has pushed investors into making highly risky investments, which has pushed valuations in global equity and bond markets to extreme levels.
But it would put the US central bank at odds with the International Monetary Fund, which earlier this month urged the Fed to wait until next year to raise short-term interest rates.
In its annual review of the US economy, the IMF argued that the Fed could be forced into an embarrassing reversal of monetary policy if it cut rates prematurely.
"Raising rates too soon could trigger a greater than expected tightening of financial conditions or a bout of financial instability, causing the economy to stall," the IMF report said. "This would likely force the Fed to reverse direction, moving rates back down towards zero with potential costs to credibility."
Investors worry that US interest rate rises are likely to reverberate through the global economy, as money is pulled out of emerging markets and used to buy higher-yielding US assets. A Fed rate rise could also push the US dollar sharply higher, hitting borrowers in emerging markets that have large US dollar-denominated debts.
But while most investors are resigned to a US interest rate rise in September or December, some - such as high-profile US bond trader Jeffrey Gundlach, who heads the bond firm DoubleLine Capital - believe the patient is still far to weak to quit the sick bed.
Speaking to investors on a conference call earlier this month, Gundlach predicted that relatively anaemic growth and low inflation meant the Fed would take longer to raise rates than the consensus is expecting. (The weakness in the US economy in the first quarter has caused the Fed to cut back its 2015 growth forecast to 1.8 to 2 per cent, from 2.3 to 2.7 per cent previously.)
And he offered an interesting explanation for the Fed's continued warnings to investors that higher rates were on the way.
"I'm wondering why the Fed is so interested in talking about raising interest rates," he said. "My conclusion is they just don't want to be at zero. When the next economic weakness comes, it's a real problem if the Fed is at zero."
Fairfax Media Management Pty Limited
Document AFNR000020150619eb6k0002a