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The "vigilantes" of the bond market of formerly intimidated the wastrel governments. They now seem to have reached a more ambitious goal: the US Federal Reserve.
Traders are betting that the US central bank will be certain to cut interest rates when it meets this month. Fed Chairman Jay Powell largely dismissed doubts on Wednesday, focusing on continued weakness in inflation in the world's largest economy and worsening global growth prospects.
But the prospect of monetary easing still seems odd when compared to generally decent US economic data. Richard Barwell, head of macro-research at BNP Paribas Asset Management, says investors have pushed the central bank to take a defensive stance.
"The market has apparently pushed the Fed to change its strategy twice in the space of six months, first by capitulating on the upward cycle and then by adopting a cycle of easing", a- he declared. "It is increasingly difficult to claim that this Fed would reduce rates this month. . . in the absence of the incessant market pressure to act now. "
The crucial question facing the Fed and investors is whether the markets are right and what it means for the long-term, often stormy, relationship between the central bank and investors.
The message from the market is clear: interest rate futures indicate that traders believe the Fed could cancel the four rate hikes last year by 2020. But the leaders themselves seem uncertain about to the conduct to hold.
The latest projections indicate that seven policymakers are forecasting rate cuts of 50 basis points by the end of the year. Powell said many of the remaining 10 members of the Federal Open Market Committee, a rate-setting group, thought the need for an easier policy had increased. Analysts believe the Fed is stuck and will have to cut spending to avoid badet price turbulence.
"The market acted as if the Fed had already cut. If the Fed does not get its results, financial conditions will tighten, creating a headwind for the economy, "said Michelle Meyer, chief economist at Bank of America.
"This puts the Fed in a difficult position," she added. "On the one hand, they do not want to be intimidated by the markets. But, on the other hand, the markets have information that the Fed can not ignore. "
Although US economic data has deteriorated over the past year, it remains relatively strong – a fact that even Powell pointed out in his otherwise dovish comments this week.
Indeed, the "immediate forecast" models developed by the Fed's New York and New York forces indicate that growth is rebounding and that the trade war is at least temporarily suspended after a truce the recent G20 summit.
In addition, the latest employment data was brisk and core inflation accelerated last month as some of the "transitional" factors previously discussed by Mr. Powell began to weaken. "The market is intimidating and the data is watching them now," Barwell said.
Of course, the current data says little about the future, and continuing uncertainties caused by trade tensions are likely to weigh on global economic growth in the coming months, economists say. But even some former central bankers are questioning the Fed's willingness to lower rates.
Vitor Constâncio, former vice president of the European Central Bank, said that monetary policy "should be decided according to the relevant economic variables and not according to the dominance of the financial markets, because they wish to artificially extend a long upside. market".
The clbadic argument against the blindly followed markets came from the former Fed Chairman, Ben Bernanke, in 2004. He explained that although the markets "collect huge amounts of money," he said. information, they thus constitute a precious hunting ground for the central bankers who wish to know more about the economy ". is a strategy that "quickly degenerates into a mirror room".
In other words, if the Fed simply changed rates based on market prices, they would be influenced by Fed expectations, creating feedback loops that could lead to terrible mistakes. Jan Hatzius of Goldman Sachs sees three potential pitfalls.
"First, the effect of the mirror gallery would surely degrade the information content of bond yields. Secondly, the temptation to meet market expectations in an asymmetric way – to avoid giving hawkish surprises – could undermine financial stability. Third, the bond market could become a channel of political pressure on the Fed's decisions, "he said.
Moreover, some badysts believe that the Fed not only has the right to monitor the markets, but should do so more often.
The US central bank may have an army of economists, sophisticated models refined by generations of employees and access to data that most hedge funds can only dream. According to Jim Paulsen, a strategist with the Leuthold Group, even the intellectual capabilities of the Fed are overwhelmed by the collective wisdom of millions of investors shaping the bond market.
"I'm not saying markets do not make mistakes, but I think they make fewer mistakes than a central bankers committee," he said.
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