federal reserve bank ft
Central Bank Meddling
The unprecedented growth in central banks’ balance sheets since the financial crisis has had a negative impact on the way in which financial markets function, according to a new report from the Bank for International Settlements. Over the past decade the world’s major central banks have lent vast sums of cheap money as well as buying trillions of dollars in bonds and other assets in a bid to stimulate the global economy. Some are still expanding their balance sheets: the European Central Bank last month decided to restart its €2.6tn bond-buying programme, while the Bank of Japan has used bond-buying as a stimulus measure for decades. Last month’s spike in short-term US borrowing costs was just the latest in a series of market shocks that have fuelled investors’ suspicions that this radical monetary policy is having an impact on how financial markets function. The BIS, the central bank for central banks, said on Monday that, while the immediate impact had eased the severe market strains created by the 2008 financial crisis, there had been several negative side-effects. These included a scarcity of bonds available for investors to purchase, squeezed liquidity in some markets, higher levels of bank reserves and fewer market operators actively trading in some areas. “Lower trading volumes and price volatility, compressed credit spreads and flatter term structures may reduce the attractiveness of investing and dealing in bond markets,” the BIS said in a report published on Monday. “Some players may leave the market altogether, resulting in a more concentrated and homogenous set of investors and fewer dealers.” This “could result in market malfunctioning when large central bank balance sheets are eventually unwound”, the BIS warned. “For instance, it could make it more difficult for reserves to be redistributed effectively between market participants.” Negative impacts have been more prevalent when central banks hold a larger share of outstanding assets, the BIS said; major central banks’ holdings of domestic sovereign bonds range from 20 per cent of outstanding paper at the US Fed to over 40 per cent in Japan. But the BIS said these side-effects had so far only rarely affected financial conditions in such a way as to impede central banks’ monetary policymaking, though it added that the full consequences were unlikely to become clear until major central banks started to shrink their balance sheets. Recommended Markets Insight What a decade of monetary policy innovation has taught us Fears about the side-effects of the past decade of unprecedentedly loose monetary policy were highlighted last month by a sharp rise in borrowing costs in the US overnight money markets. The US Federal Reserve — which recently halted the scaling-back of its balance sheet — was forced to inject $140bn of liquidity to ease the squeeze. As the Fed conducts a post mortem into the event, it is looking at how banking regulation, supervision and risk management policies affect its own balance sheet. A significant increase in sales of US Treasuries over the past couple of years has meant that investors have not experienced a shortage of bonds to buy, and thus the Fed’s bond-buying programme “appeared to have little impact on Treasury market functioning”, the BIS said But the growth in the quantity of financial assets held by the Fed resulted in an offsetting expansion in the liability side of the Fed’s balance sheet, as it lent out more cash reserves to banks. Policymakers had expected that the handful of large Wall Street banks that hold about a quarter of US banks’ total reserves would lend them out overnight when rates rose high enough — but, during last month’s market strain, that did not happen. The BIS noted that regulations demanding liquidity at large banks might discourage the banks from offering to lend out their reserves — a source of same-day liquidity — into overnight markets. This is similar to what the large banks themselves have said in the last month. But the BIS also noted that since the financial crisis, risk management practices might have changed within the banks themselves. Eric Rosengren, president of the Boston Fed, agreed, telling the FT on Saturday that differences in reserve holdings among the large banks showed that reluctance to lend reserves was likely to be a consequence of “tastes and preferences” specific to each bank.
Negative Rates
Earlier this month, I asked a former luminary of US monetary policy if he thought interest rates in America might ever tumble into negative territory by design (as a deliberate Federal Reserve policy move rather than the result of a market swing). “No!” he replied emphatically, explaining that he, and most of his former colleagues, strongly disliked the idea of negative interest rates, never mind the fact that Europe and Japan have been experimenting with them for some time (and President Donald Trump would probably love the Fed to follow suit). This is partly, he explained, because he fears that negative rates can distort markets. As the Bank for International Settlements, the central banks’ bank, pointed out in a report this week, the use of unconventional monetary policy runs the risk “of eroding incentives for the private sector to maintain adequate buffers against financial stress”. But there is also another factor in play: psychology. When rates turn negative, it can contribute to a sense that markets are stepping “through the looking glass”, as Scott Clemons, chief investment strategist for private wealth management at Brown Brothers Harriman, said recently. The former policy luminary I spoke to argued that this makes people feel so anxious that it undermines the benefit of cheaper loans. “People worry even more,” he explained. “It hurts confidence.” For a long time, economists tended to focus on tangible issues such as a country’s gross domestic product and the money supply. However, after the 2008 financial crisis, the profession was forced to broaden its outlook. Most notably, the field of behavioural economics, which had existed for decades, became far more influential, bringing psychological insights into economic models. Recommended Markets Insight What a decade of monetary policy innovation has taught us As the world has slid into uncharted territory with monetary-policy experiments, some central bankers are pondering how culture and consumer perception are affected. And a few central bank economists, such as Claudio Borio at the BIS, have questioned whether negative rates send a confusing signal to investors. In my view, this is long overdue. Economists (and journalists) used to assume that central banks influenced the economy simply by controlling the supply and price of money. However, as the anthropologist Douglas Holmes outlines in his book Economy of Words (2013), monetary mechanics is only half the game; the stories that central banks tell us have a strong influence on the economy. Consider Japan. When deflation emerged there in the 1990s, most economists blamed it on economic contraction and the financial crisis. That was, of course, partly true but I was living in the country at the time and noticed that many business leaders (as well as ordinary people) assumed that the authorities were concealing the level of bad loans in the system. This created such a corrosive attitude of mistrust that investors assumed prices had further to fall, exacerbating the deflationary conditions. (China should take note given its own bad loan woes.) Subsequently, the Bank of Japan unleashed monetary policy experiments to combat deflation, including, eventually, negative rates. However, this seemed to have little effect on consumer or corporate psychology; on the contrary, when I interviewed investors there, they seemed to be even more spooked than before, since they feared the radical experimentation suggested the BoJ knew something nasty that they did not. I suspect something similar has been afoot in Switzerland recently, where rates are currently negative. So too in the eurozone, where the European Central Bank pushed rates further back into negative territory last month. Economic theory would suggest that negative rates ought to spur more companies and consumers to spend – after all, why would anyone save when banks are charging for holding cash? But you only need to read the German popular press right now to see how unpopular this experiment is. In fact, the risk is that negative rates simply fuel fears among investors that something is deeply – and permanently - wrong in this Alice-in-Wonderland world. Is there a solution? The obvious one is for politicians to stop delegating the heavy lifting to the central banks – and to start using other forms of economic stimulus (such as infrastructure spending) and intelligent structural reform to create growth. No doubt Christine Lagarde, the incoming head of the ECB, will hammer this point home when she arrives. But don’t hold your breath that this will happen any time soon given the state of western democracies. Perhaps central bankers should consider other options. One would be to avoid talking about negative rates and instead use techniques that provide support but which are so complex that mere mortals struggle to understand them (this is partly what quantitative easing has done). Or, if they must do outlandish things, central bankers should announce an end date and parameters, to counter the impression that consumers are falling into a bottomless hole of bizarre economics. One thing that does not create positive consumer sentiment is to turn monetary policy into a form of political combat, while muttering about negative rates – or the threat of new recessions. Donald Trump take note; negative (or zero) rates are not a magic wand.
Yield curve inverts
Over the summer, investors put a gimlet eye to returns on US Treasuries, examining them for signs of a recession. The Fed has been watching, too, with some disagreement over what it is seeing and how to respond. In appearances this week, two Fed presidents laid out different arguments for the recent dramatic fall in Treasury yields and the concurrent inversion of the yield curve — a traditional harbinger of recession, in which shorter-term interest rates are higher than longer-term ones. Eric Rosengren, president of the Boston Fed, attributed the developments in the Treasury market to economic weakness abroad, which means there is less reason for concern at the US central bank. Robert Kaplan, president of the Dallas Fed, blamed concerns over domestic growth, highlighting the need for the Fed to cut interest rates. Their disagreement lies at the heart of the central bank’s debate about what to do at its next policy meeting, later this month, where Fed chairman Jay Powell is facing a divided committee. Markets have priced in a 25 basis point cut in the Fed’s policy rate, the same size as its cut in July, which drew two dissensions from committee members. I think the whole curve moving down, particularly at the long end, tells me there’s a lot more pessimism about future growth prospects Robert Kaplan, president of the Dallas Fed Yield curve inversions have occurred before each US recession of the last half century, so they serve as an indicator that something bad is coming. The spread between the three-month bill and the 10-year note now sits at minus 40 basis points. That is off recent lows, but still around levels last seen in March 2007. Auguring from inversion has a weakness, though. It can suggest that a recession is coming. It cannot say when. In a note on Thursday, analysts at Bank of America Merrill Lynch found that a recession could start as soon as eight months after an inversion. They also found that it could take as long as five years. Speaking at a Stonehill College in Massachusetts on Tuesday, Mr Rosengren said this inversion is different. In the past, he explained, most inversions had been created by the Fed itself, as it raised short-term rates at the end of an expansion to slow growth and prevent inflation. What is driving this inversion, he said, is the drop in longer-term yields, which in turn reflect “challenging economic conditions in much of the rest of the world”. Mr Rosengren’s argument is similar to that made by the Trump administration: global investors are buying anything with a dollar sign, both for security and better returns. “Basically this is the best game in town across the globe,” Peter Navarro told Fox Business Network last week. For longer-dated debt, he said, “we’ve got money flowing into the bond market that’s pushing up prices, pushing down yields”. Mr Navarro, who runs the White House’s trade and industrial policy, then argued for the Fed to lower rates on the short end as well. That is not Mr Rosengren’s preferred path. In July, he dissented from the Fed’s decision to lower its policy rate by a quarter point. The yield curve had not changed his mind this week. “Financial market indicators,” he said in his speech, “remain benign.” Mr Kaplan reads in the yield curve a simpler, more traditional story: lower yields on US Treasuries in the future show concern over lower US growth in the future. “I think the whole curve moving down, particularly at the long end, tells me there’s a lot more pessimism about future growth prospects,” he told the Financial Times on Wednesday. Mr Kaplan has been watching a different inversion: between the Fed’s main policy rate and yields on all US government debt. The fed funds rate of 2-to-2.5 per cent is now above the entire Treasury yield curve, including the 30-year bond, as it was in 2006. If that situation persists, Mr Kaplan said, “it will create its own set of distortions and challenges, which may seem innocuous for a time, but I think eventually will create issues which tighten financial conditions”. Recommended Capital markets Powell fails to bend yield curve to his will Mr Rosengren is a voting member of the FOMC this year. Mr Kaplan, an alternate this year, will vote in 2020. “For those who say, ‘Well, there’s reasons and this time is different,’ that may be true,” said Mr Kaplan, referring to the Treasury yield curve inversion, “but my experience in my career has been trying to make explanations with ‘this time is different’ haven’t gone well.”
Powel cant bend yield curve
The Federal Reserve’s quarter-point interest rate cut on Wednesday failed to have the desired effect on a widely followed bond market indicator of recession. The yield curve — reflecting the difference between the yields on three-month and 10-year US Treasury bonds — dropped further into negative territory, settling at minus 5.5 basis points. The measure has turned negative or “inverted” before every US recession of the past 50 years, and analysts said the development indicated that investors doubted the central bank had acted decisively enough to shore up the US economy. Analysts also noted that another closely watched portion of the yield curve — the difference between two-year and 10-year Treasury yields — collapsed to its narrowest gap in four months, while the US dollar rose as much as 0.6 per cent versus its peer currencies. “The clear signal coming from the strengthening of the dollar and the flattening of the yield curve is that the market is crying out for more accommodation,” said Subadra Rajappa, head of US rates strategy at Société Générale. She said investors were worried that the Fed would not deliver as many cuts as they had anticipated. Fed chairman Jay Powell called the 25bp cut a “mid-cycle adjustment to policy” that was “not the beginning of a long series of rate cuts”. The clear signal coming from the strengthening of the dollar and the flattening of the yield curve is that the market is crying out for more accommodation Subadra Rajappa, Société Générale Markets had priced in almost 100bp of cuts in the next year before the Fed acted on Wednesday. Now traders reckon there is an almost 40 per cent chance the Fed will leave rates unchanged in September, up from 25 per cent earlier this week. Krishna Guha, head of global policy and central bank strategy at Evercore ISI, said the yield curve move reflected the Fed’s messaging. “How do you un-invert the yield curve? You cut aggressively at the front end, but also do so in a way that convinces people that the growth outlook will be stronger so longer-terms yields rise,” he said. “If the Fed raises a little bit of doubt or confusion about how strong the commitment is to be aggressive and pre-emptive with interest rate cuts, you can see how mechanically that would lead to a more inverted curve,” he added. Robert Tipp of PGIM Fixed Income said that as a result of the Fed’s “hawkishness”, the US central bank had tightened financial conditions.
The unprecedented growth in central banks’ balance sheets since the financial crisis has had a negative impact on the way in which financial markets function, according to a new report from the Bank for International Settlements. Over the past decade the world’s major central banks have lent vast sums of cheap money as well as buying trillions of dollars in bonds and other assets in a bid to stimulate the global economy. Some are still expanding their balance sheets: the European Central Bank last month decided to restart its €2.6tn bond-buying programme, while the Bank of Japan has used bond-buying as a stimulus measure for decades. Last month’s spike in short-term US borrowing costs was just the latest in a series of market shocks that have fuelled investors’ suspicions that this radical monetary policy is having an impact on how financial markets function. The BIS, the central bank for central banks, said on Monday that, while the immediate impact had eased the severe market strains created by the 2008 financial crisis, there had been several negative side-effects. These included a scarcity of bonds available for investors to purchase, squeezed liquidity in some markets, higher levels of bank reserves and fewer market operators actively trading in some areas. “Lower trading volumes and price volatility, compressed credit spreads and flatter term structures may reduce the attractiveness of investing and dealing in bond markets,” the BIS said in a report published on Monday. “Some players may leave the market altogether, resulting in a more concentrated and homogenous set of investors and fewer dealers.” This “could result in market malfunctioning when large central bank balance sheets are eventually unwound”, the BIS warned. “For instance, it could make it more difficult for reserves to be redistributed effectively between market participants.” Negative impacts have been more prevalent when central banks hold a larger share of outstanding assets, the BIS said; major central banks’ holdings of domestic sovereign bonds range from 20 per cent of outstanding paper at the US Fed to over 40 per cent in Japan. But the BIS said these side-effects had so far only rarely affected financial conditions in such a way as to impede central banks’ monetary policymaking, though it added that the full consequences were unlikely to become clear until major central banks started to shrink their balance sheets. Recommended Markets Insight What a decade of monetary policy innovation has taught us Fears about the side-effects of the past decade of unprecedentedly loose monetary policy were highlighted last month by a sharp rise in borrowing costs in the US overnight money markets. The US Federal Reserve — which recently halted the scaling-back of its balance sheet — was forced to inject $140bn of liquidity to ease the squeeze. As the Fed conducts a post mortem into the event, it is looking at how banking regulation, supervision and risk management policies affect its own balance sheet. A significant increase in sales of US Treasuries over the past couple of years has meant that investors have not experienced a shortage of bonds to buy, and thus the Fed’s bond-buying programme “appeared to have little impact on Treasury market functioning”, the BIS said But the growth in the quantity of financial assets held by the Fed resulted in an offsetting expansion in the liability side of the Fed’s balance sheet, as it lent out more cash reserves to banks. Policymakers had expected that the handful of large Wall Street banks that hold about a quarter of US banks’ total reserves would lend them out overnight when rates rose high enough — but, during last month’s market strain, that did not happen. The BIS noted that regulations demanding liquidity at large banks might discourage the banks from offering to lend out their reserves — a source of same-day liquidity — into overnight markets. This is similar to what the large banks themselves have said in the last month. But the BIS also noted that since the financial crisis, risk management practices might have changed within the banks themselves. Eric Rosengren, president of the Boston Fed, agreed, telling the FT on Saturday that differences in reserve holdings among the large banks showed that reluctance to lend reserves was likely to be a consequence of “tastes and preferences” specific to each bank.
Negative Rates
Earlier this month, I asked a former luminary of US monetary policy if he thought interest rates in America might ever tumble into negative territory by design (as a deliberate Federal Reserve policy move rather than the result of a market swing). “No!” he replied emphatically, explaining that he, and most of his former colleagues, strongly disliked the idea of negative interest rates, never mind the fact that Europe and Japan have been experimenting with them for some time (and President Donald Trump would probably love the Fed to follow suit). This is partly, he explained, because he fears that negative rates can distort markets. As the Bank for International Settlements, the central banks’ bank, pointed out in a report this week, the use of unconventional monetary policy runs the risk “of eroding incentives for the private sector to maintain adequate buffers against financial stress”. But there is also another factor in play: psychology. When rates turn negative, it can contribute to a sense that markets are stepping “through the looking glass”, as Scott Clemons, chief investment strategist for private wealth management at Brown Brothers Harriman, said recently. The former policy luminary I spoke to argued that this makes people feel so anxious that it undermines the benefit of cheaper loans. “People worry even more,” he explained. “It hurts confidence.” For a long time, economists tended to focus on tangible issues such as a country’s gross domestic product and the money supply. However, after the 2008 financial crisis, the profession was forced to broaden its outlook. Most notably, the field of behavioural economics, which had existed for decades, became far more influential, bringing psychological insights into economic models. Recommended Markets Insight What a decade of monetary policy innovation has taught us As the world has slid into uncharted territory with monetary-policy experiments, some central bankers are pondering how culture and consumer perception are affected. And a few central bank economists, such as Claudio Borio at the BIS, have questioned whether negative rates send a confusing signal to investors. In my view, this is long overdue. Economists (and journalists) used to assume that central banks influenced the economy simply by controlling the supply and price of money. However, as the anthropologist Douglas Holmes outlines in his book Economy of Words (2013), monetary mechanics is only half the game; the stories that central banks tell us have a strong influence on the economy. Consider Japan. When deflation emerged there in the 1990s, most economists blamed it on economic contraction and the financial crisis. That was, of course, partly true but I was living in the country at the time and noticed that many business leaders (as well as ordinary people) assumed that the authorities were concealing the level of bad loans in the system. This created such a corrosive attitude of mistrust that investors assumed prices had further to fall, exacerbating the deflationary conditions. (China should take note given its own bad loan woes.) Subsequently, the Bank of Japan unleashed monetary policy experiments to combat deflation, including, eventually, negative rates. However, this seemed to have little effect on consumer or corporate psychology; on the contrary, when I interviewed investors there, they seemed to be even more spooked than before, since they feared the radical experimentation suggested the BoJ knew something nasty that they did not. I suspect something similar has been afoot in Switzerland recently, where rates are currently negative. So too in the eurozone, where the European Central Bank pushed rates further back into negative territory last month. Economic theory would suggest that negative rates ought to spur more companies and consumers to spend – after all, why would anyone save when banks are charging for holding cash? But you only need to read the German popular press right now to see how unpopular this experiment is. In fact, the risk is that negative rates simply fuel fears among investors that something is deeply – and permanently - wrong in this Alice-in-Wonderland world. Is there a solution? The obvious one is for politicians to stop delegating the heavy lifting to the central banks – and to start using other forms of economic stimulus (such as infrastructure spending) and intelligent structural reform to create growth. No doubt Christine Lagarde, the incoming head of the ECB, will hammer this point home when she arrives. But don’t hold your breath that this will happen any time soon given the state of western democracies. Perhaps central bankers should consider other options. One would be to avoid talking about negative rates and instead use techniques that provide support but which are so complex that mere mortals struggle to understand them (this is partly what quantitative easing has done). Or, if they must do outlandish things, central bankers should announce an end date and parameters, to counter the impression that consumers are falling into a bottomless hole of bizarre economics. One thing that does not create positive consumer sentiment is to turn monetary policy into a form of political combat, while muttering about negative rates – or the threat of new recessions. Donald Trump take note; negative (or zero) rates are not a magic wand.
Yield curve inverts
Over the summer, investors put a gimlet eye to returns on US Treasuries, examining them for signs of a recession. The Fed has been watching, too, with some disagreement over what it is seeing and how to respond. In appearances this week, two Fed presidents laid out different arguments for the recent dramatic fall in Treasury yields and the concurrent inversion of the yield curve — a traditional harbinger of recession, in which shorter-term interest rates are higher than longer-term ones. Eric Rosengren, president of the Boston Fed, attributed the developments in the Treasury market to economic weakness abroad, which means there is less reason for concern at the US central bank. Robert Kaplan, president of the Dallas Fed, blamed concerns over domestic growth, highlighting the need for the Fed to cut interest rates. Their disagreement lies at the heart of the central bank’s debate about what to do at its next policy meeting, later this month, where Fed chairman Jay Powell is facing a divided committee. Markets have priced in a 25 basis point cut in the Fed’s policy rate, the same size as its cut in July, which drew two dissensions from committee members. I think the whole curve moving down, particularly at the long end, tells me there’s a lot more pessimism about future growth prospects Robert Kaplan, president of the Dallas Fed Yield curve inversions have occurred before each US recession of the last half century, so they serve as an indicator that something bad is coming. The spread between the three-month bill and the 10-year note now sits at minus 40 basis points. That is off recent lows, but still around levels last seen in March 2007. Auguring from inversion has a weakness, though. It can suggest that a recession is coming. It cannot say when. In a note on Thursday, analysts at Bank of America Merrill Lynch found that a recession could start as soon as eight months after an inversion. They also found that it could take as long as five years. Speaking at a Stonehill College in Massachusetts on Tuesday, Mr Rosengren said this inversion is different. In the past, he explained, most inversions had been created by the Fed itself, as it raised short-term rates at the end of an expansion to slow growth and prevent inflation. What is driving this inversion, he said, is the drop in longer-term yields, which in turn reflect “challenging economic conditions in much of the rest of the world”. Mr Rosengren’s argument is similar to that made by the Trump administration: global investors are buying anything with a dollar sign, both for security and better returns. “Basically this is the best game in town across the globe,” Peter Navarro told Fox Business Network last week. For longer-dated debt, he said, “we’ve got money flowing into the bond market that’s pushing up prices, pushing down yields”. Mr Navarro, who runs the White House’s trade and industrial policy, then argued for the Fed to lower rates on the short end as well. That is not Mr Rosengren’s preferred path. In July, he dissented from the Fed’s decision to lower its policy rate by a quarter point. The yield curve had not changed his mind this week. “Financial market indicators,” he said in his speech, “remain benign.” Mr Kaplan reads in the yield curve a simpler, more traditional story: lower yields on US Treasuries in the future show concern over lower US growth in the future. “I think the whole curve moving down, particularly at the long end, tells me there’s a lot more pessimism about future growth prospects,” he told the Financial Times on Wednesday. Mr Kaplan has been watching a different inversion: between the Fed’s main policy rate and yields on all US government debt. The fed funds rate of 2-to-2.5 per cent is now above the entire Treasury yield curve, including the 30-year bond, as it was in 2006. If that situation persists, Mr Kaplan said, “it will create its own set of distortions and challenges, which may seem innocuous for a time, but I think eventually will create issues which tighten financial conditions”. Recommended Capital markets Powell fails to bend yield curve to his will Mr Rosengren is a voting member of the FOMC this year. Mr Kaplan, an alternate this year, will vote in 2020. “For those who say, ‘Well, there’s reasons and this time is different,’ that may be true,” said Mr Kaplan, referring to the Treasury yield curve inversion, “but my experience in my career has been trying to make explanations with ‘this time is different’ haven’t gone well.”
Powel cant bend yield curve
The Federal Reserve’s quarter-point interest rate cut on Wednesday failed to have the desired effect on a widely followed bond market indicator of recession. The yield curve — reflecting the difference between the yields on three-month and 10-year US Treasury bonds — dropped further into negative territory, settling at minus 5.5 basis points. The measure has turned negative or “inverted” before every US recession of the past 50 years, and analysts said the development indicated that investors doubted the central bank had acted decisively enough to shore up the US economy. Analysts also noted that another closely watched portion of the yield curve — the difference between two-year and 10-year Treasury yields — collapsed to its narrowest gap in four months, while the US dollar rose as much as 0.6 per cent versus its peer currencies. “The clear signal coming from the strengthening of the dollar and the flattening of the yield curve is that the market is crying out for more accommodation,” said Subadra Rajappa, head of US rates strategy at Société Générale. She said investors were worried that the Fed would not deliver as many cuts as they had anticipated. Fed chairman Jay Powell called the 25bp cut a “mid-cycle adjustment to policy” that was “not the beginning of a long series of rate cuts”. The clear signal coming from the strengthening of the dollar and the flattening of the yield curve is that the market is crying out for more accommodation Subadra Rajappa, Société Générale Markets had priced in almost 100bp of cuts in the next year before the Fed acted on Wednesday. Now traders reckon there is an almost 40 per cent chance the Fed will leave rates unchanged in September, up from 25 per cent earlier this week. Krishna Guha, head of global policy and central bank strategy at Evercore ISI, said the yield curve move reflected the Fed’s messaging. “How do you un-invert the yield curve? You cut aggressively at the front end, but also do so in a way that convinces people that the growth outlook will be stronger so longer-terms yields rise,” he said. “If the Fed raises a little bit of doubt or confusion about how strong the commitment is to be aggressive and pre-emptive with interest rate cuts, you can see how mechanically that would lead to a more inverted curve,” he added. Robert Tipp of PGIM Fixed Income said that as a result of the Fed’s “hawkishness”, the US central bank had tightened financial conditions.
Comments
Post a Comment