Good morning everyone. Another false dawn for direction in our market then as the Fed do exactly what they should have done; and more than that, go out of their way to reiterate earlier guidelines in an attempt to leave the ground as neutral as possible for Ms Yellen. Let`s all hope that the next few years provide an easier passage for her than for her predecessor.
She inherits an improving US economy and a general global picture of growth. There are of course always going to be issues that spoil this generally (comparatively) rosy picture both internally and externally. The current turmoil in some EM nations is an example, but when analysed their individual problems are generally found to be symptom`s of economic mismanagement internally, and solutions are not available from the FOMC! The greatest challenge for Ms Yellen that can be identified now will be when to actually tighten, and the withdrawal of the bond purchase programme is NOT tightening. If there was a hint of something slightly different at all in the Fed`s statement yesterday, it was a slightly more robust feel behind the taper. As I said yesterday, I really think there has been a firming up at the Fed for the need to get this monkey off their back asap, and I think their resolve will need a pretty poor run of US statistics to shake it. The markets get that, but by retaining the flexibility that they still give themselves, if they now decide NOT to follow the yellow brick road, it will give an even more negative signal than was the case before.
At the forefront of Central Bank rhetoric both sides of the pond for a long time now has been the mantra – low rates for longer. Mark McCarney (actually the 5th Beatle!) hinted yesterday at the fragility of a recovery based predominately on consumer spending, and the need for business to catch confidence and invest. All true, but the acid test ahead for Central Banks will probably be when to act pre-emptively and raise rates AHEAD of conclusive evidence of sustained growth. If they get the economic environment to do that, ie. falling unemployment, manageable inflation and OK GDP figures, it will be very very easy, and very tempting to wait too long. I say easy, because hard wired in their decision making process will be the inevitability of a barrage of criticism when they do tighten, about choking off the recovery.
In a strange fashion, the layman`s way to judge whether they get this right or not when the time comes, will be to measure this opposition – a hostile letter signed by 50 or so CEO`s normally means the timing is dead on!!
In horse racing parlance, they say that more races are lost by jockeys getting to the front too early, rather than leaving it too late. For Central Banks, to leave it too late would set the stage for yet more boom and bust. The timing will be absolutely crucial, and it is to this scenario that attention will probably be focussed later on this year. So for the Fed, get QE out of the way as a priority, and as a mindset on both sides of the Atlantic, throw away forward guidance. The intentions are clear enough now, but remember that the right timing will be met with stiff opposition, the wrong timing will see a hike welcomed and approved of! Lets wish the new Yellen and McCarney partnership many hits…
