In an age when the actions of central bankers drive markets more than ever before, every word that they utter is pored over and analysed to death.
So-called “Fed-watchers” are experts at reading a great deal into even the tiniest nuances of statements from central banks around the world including the US Federal Reserve and the Bank of England.
For example, let’s compare this week’s statement from the Fed about rates across the pond to the statement from their last meeting in June.
June: “The Committee anticipates it will be appropriate to raise rates…when it has seen further improvement in the labour market…”
July: “The Committee anticipates it will be appropriate to raise rates…when it has seen some further improvement in the labour market…”
Did you spot the difference?
It was the additional of the word “some” in the July statement. The Fed now wants to see “some further improvement” as opposed to just “further improvement.” Most normal people would think that says the same thing but, in the carefully analysed world of monetary policy, that one word is deemed significant.
Analysts have taken this statement to mean that we are much more likely to see a rate increase at the next Fed meeting in September. The labour market, or rather wage growth and employment, only needs to improve marginally rather than significantly between now and then. As a result, yields on US Treasury bonds fell and the dollar rose, all because of that little “some”.
It’s the same on this side of the Atlantic where Mark Carney’s recent speech was similarly analysed. At least in his case he was slightly less cryptic:
“The decision as to when to start (putting rates up) will probably come into sharper relief around the turn of this year,” said Mr Carney.
“Short term interest rates have averaged around 4.5% since around the Bank’s inception three centuries ago,” he continued. “It would not seem unreasonable to me to expect that once normalisation begins, interest rate increases would proceed slowly and rise to a level in the medium term that is perhaps about half as high as historical averages.”
Ok not exactly crystal but a bit less opaque than the Fed. We can take from this that rates may go up some time around the turn of the year and (if we do the maths) will eventually end up around 2.25%.
Again, this sort of statement drives markets. The UK bond market is factoring in pretty much exactly this scenario.
Of course Mark Carney is only one vote on the Bank’s Monetary Policy Committee and others might think differently, however half the committee members are Bank staff and they tend to agree with their boss.
The important caveat to all this is that both the Bank of England and the Fed stress that the decision to increase rates is data dependent. If the jobs market deteriorates, inflation prospects slip further, or the economy weakens, then they will have to delay putting rates up.
Unfortunately, both central banks have a terrible record of forecasting any of these factors. External economists are often no better and so even with all this forward guidance and detailed analysis, the water remains muddied.
What we can (hopefully) rely upon is that both banks will be incredibly cautious about putting up rates, doing so very slowly and watching carefully for any sign that it will harm the economy.
The content contained in this blog represents the opinions of Equilibrium investment management team. The commentary in this blog in no way constitutes a solicitation of investment advice. It should not be relied upon in making investment decisions and is intended solely for the entertainment of the reader.