February 24, 2017: Several Federal Reserve policymakers said it may raise interest rate ‘fairly soon’ should jobs and inflation data come in line with expectations. This is according to the minutes of the Fed’s meeting released on Wednesday.

“Many participants expressed the view that it might be appropriate to raise the federal funds rate again fairly soon if incoming information on the labour market and inflation was in line with or stronger than their current expectations,” the Fed said in the minutes.

Fed Chair Janet Yellen said it would be ‘unwise’ to wait for too long to raise the rates again. This gave a strong indication that the central bank remains on track to consider raising rates again by the summer.

Prices for US stocks fell marginally following the publication of the minutes and yields on US government debt also dropped. Expectations on when the Fed will next raise rates were little changed, with investors predicting a move in May at the earliest, according to fed fund futures data compiled by the CME Group.

Among voting members in general, there was much less urgency to raise rates with many seeing only a ‘modest risk’ that inflation would increase significantly and that the Fed would ‘likely have ample time’ to respond if price pressures emerged.

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The good performance has led to speculation of a further rate hike.

The Federal Reserve had raised interest rates in December. The hike was the second time interest rates were hiked since the 2007-2009 financial crisis.

“Waiting too long to begin moving toward the neutral rate could risk a nasty surprise down the road — either too much inflation, financial instability, or both,” Yellen told the Commonwealth Club of California in San Francisco.

“In that scenario, we could be forced to raise interest rates rapidly, which in turn could push the economy into a new recession.”

Benchmark US Treasury yields rose and the dollar strengthened after the remarks. Yellen said asset valuations, including stock prices in part, reflect expectations that the Fed will normalise rates faster than other central banks.

JP Morgan Chase & Co. Chief Executive Officer Jamie Dimon has predicted that interest rates will rise along with a growing US economy. “I believe America is doing better than people think and therefore interest rates are probably going to be stronger than people think,” Dimon told health investors and executives at the JP Morgan Healthcare Conference in San Francisco.

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 IFM Correspondent

December 15, 2016: Citing an improving economy, the US Federal Reserve raised its key interest rate on December 14 for the first time in 2016 by a quarter percentage point. In a statement after a two-day meeting, the Fed said policymakers unanimously agreed to lift the benchmark federal funds rate – the rate banks charge each other for overnight loans — from 0.4% to 0.6%.

The hike is only the second since 2008 despite an unemployment rate that has tumbled from 10% in 2009 to a near-normal 4.6%. “Our decision to raise rates should certainly be understood as reflecting the confidence we have in the progress the economy has made and our judgement that will continue,” Fed Chair Janet Yellen said at a news conference.

Yellen also said that Trump’s blueprint of cutting taxes and beefing up defence expenses may have been a factor for some policy makers in their decision to raise rates. But she added the details of the plan and how much of it Congress will pass are unknown. “We’re operating under a cloud of uncertainty at the moment,” she said.

The move reflects the Fed’s growing confidence that the economy is on a sustainable growth footing — and its judgment that inflation is becoming a bigger danger to the US economy than sluggish growth or another recession.

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Ken Taubes

September 26, 2016: As expected, the Federal Reserve Board left interest rates unchanged following the September meeting of the Federal Open Market Committee (FOMC). In its statement following the meeting, the FOMC said, “The Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives.”

The Fed appears to be moving its targets. Chair Janet Yellen cited the need to wait for further improvement in the economy, even though there is evidence that the Fed’s goals have been achieved. She indicated that Committee members will continue to assess economic conditions but made no commitment on the timing of a rate increase. According to Bloomberg, the futures market places a 59% probability on a December hike, but the Fed’s shifting views make that uncertain.

Full employment?

The US unemployment rate is at 4.9%, which meets the Fed’s mission of full employment. While Chair Yellen said the labour market has been improving, she also said there is “room for further improvement.” She said, “The fact that unemployment measures have been holding steady while the number of jobs has grown solidly shows that more people, presumably in response to better employment opportunities and higher wages, have started actively seeking and finding jobs.” She added, “This is a very welcome development, both for the individuals involved, and the nation as a whole.”

But Chair Yellen also said there continues to be slack in the labour force and cited the need for further evidence of improvement in the labour market as one reason for leaving rates unchanged. This raises the question of whether the Fed is giving more importance to the broader measure of unemployment, the U6 rate published by the Bureau of Labor Statistics, which includes not only the total unemployed but part-time underemployed workers as well. This rates stands at 9.7%. The market is left guessing how much further the labour market needs to improve before the Fed will raise rates.

Mixed inflation signals

The Fed also cited inflation below its 2% target as another reason for holding rates steady. But it is becoming increasingly clear that inflation indicators are being impacted in part by government policies and factors beyond the Fed’s ability to affect the outcome with monetary policy. One such area is healthcare.

The core personal consumption expenditures index (Core PCE), which is the Fed’s preferred inflation index, and the consumer price index (CPI), use different methods to track healthcare expenses, resulting in sharply different data. CPI tracks what American consumers spend out-of-pocket (including insurance premiums) on healthcare, while PCE takes into account all healthcare spending, including costs paid by insurers, Medicare and Medicaid. Under Obamacare, Medicare and Medicaid have been aggressively pushing down reimbursement rates to healthcare providers while consumers are shouldering higher out-of-pocket costs for healthcare-related expenses.

This government-engineered cost shifting has resulted in significantly different inflation data between PCE and CPI. PCE healthcare inflation was up only 1.1% year-over-year based on the most recent July report, while CPI healthcare jumped 1% in August alone, to 4.9% year-over year. It’s worth noting that healthcare has twice the weighting in PCE vs. CPI, at 19.1% vs. 8.5%, reflecting the fact that healthcare providers pick up most healthcare costs. Monetary policy has little influence over the effect of government-mandated healthcare reimbursement rates built into Obamacare, which are holding down Core PCE inflation, while pushing up CPI inflation.

Investment outlook

Following the Fed’s decision to hold rates steady we expect further gains for risk assets. In fixed income, we expect yields to drift, with little change in the yield curve until there is a shift in the economic data or a change in Fed policy. We continue to believe that developed markets sovereigns, including most US government debt, look unattractive. Investors are being poorly compensated for duration risk as a result of negative nominal yields and negative real yields. Corporate credit is generally more desirable than Treasuries, however even here values are well below historical averages, with an upward bias on leverage. Floating rate securities, including structured securities and event-linked (catastrophe) bonds, may be attractive to hedge interest rate risk without too much yield give-up. With yields so low and a flatter yield curve, shorter duration positions have become less costly.

In equities, we favour large cap stocks over small cap stocks, and see opportunities in mid-cap stocks, many of which are benefitting from secular growth.

Ken Taubes is US Chief Investment Officer at Pioneer Investments

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Seth Roman

September 02, 2016: The intention of the Federal Reserve Board to raise rates is clear, but it is still a question of when. In her annual speech at the Jackson Hole Summit in Wyoming, Fed Chair Janet Yellen said the data is moving in the right direction and she is philosophically inclined to increase interest rates. Nevertheless, she also indicated the data does not yet support a rate hike.

The US economy is growing at a gradual pace and the jobs market is strong. However, inflation remains a sticking point. Core PCE (personal consumption expenditure), which is the Fed’s primary gauge of inflation, has been slowly rising, but remains stubbornly below the Fed’s 2% target. The July inflation report released on August 26 confirmed that inflation data remains tame, but in a slowly rising trend. Personal consumption rose a seasonally adjusted 0.3% in July from a month earlier. Consumer spending climbed 0.5% in June, 0.3% in May, and 1.1% in April.

Market expectations for one or even two rate increases this year moved higher after Yellen’s speech. Within hours after the speech, the probability of a September hike rose to 42% from 24% a week earlier. Meanwhile, the probability of a rate hike in December increased to 63.6% from 51% one week ago.

Yellen’s speech led to another leg up in short-term bond yields, which have been drifting up in recent weeks in anticipation of rising rates. The sharpest moves have been at the short end of the curve.

Two-year Treasury notes rose to 0.82% from 0.74% one week ago. Although this is down from the year-to-date high of 1.05% at the beginning of the year, the current yield is above the average for the year of 0.77%. Five-year T-bills increased to 1.20% from 1.13% one week ago, and 1.03% on August 4.

It’s worth noting that Libor (London Interbank Offer Rate), which is a key rate used by banks to price variable rate loans, has also been rising steadily this year due mostly to technical factors unrelated to Fed jawboning – more specifically, the movement of cash out of prime money market funds in response to money market reform. Libor could continue moving higher spurred in part by the expectation of a Fed rate increase.

The question now is not if, but when the Fed will raise rates. Jackson Hole revealed little new information, but only confirmed that no matter when it begins, the rate hike will be slow and gradual. The market will closely parse future data on growth, jobs and inflation for any likely impact on Fed policy.

Seth Roman is a portfolio manager with Pioneer Investments

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10th October 2013

At a time where women are taking over coveted positions in corporates and other sectors, the banking sector is no exception. Marisa Drew, Credit Suisse Group AG (CSGN)’s most senior female investment banker in Europe, expects it will take at least five years before women start to gain a greater share of senior positions in the industry. As per a report from Bloomberg and data inputs from Egon Zehnder International – women make up 19 percent of European bank boards, compared with 33 percent in the household’s products industry, which has the highest level of female representation. The world now has many influential leaders such as Angela Merkel- the German Chancellor known for her deft handling of the Euro crisis, Christine Lagarde – Managing Director of the IMF since 2011, U.S. Secretary of State –Hillary Clinton and Brazilian President- Dilma Rouseff who has been ranked as the third most powerful woman in the world by Forbes magazine. Adding to the list was Fiona Wolf, a partner of the law firm CMS Cameron McKenna LLP, who was named as the 686^th Lord Mayor of London, only the second woman chosen to head the financial district’s municipal government in 800 years.

Now, adding to the list is the deeply experienced, imaginative and technically adept economist – Janet Yellen who will be the named next chair of Fed, succeeding Ben Bernanke whose term ends in January 2014. Yellen, 67, presently the vice-chairwoman of the Board of Governors of the Federal Reserve System will be the first woman to head the central bank in its 100 year old history. The Fed is the most powerful bank in the world and any action or changes in its policy is known to impact financial markets and emerging economies immensely. Janet Yellen won the race after Obama’s trusted lieutenant Larry Summers withdrew from the candidature after being opposed in the Senate for his close affiliations in the Wall Street. Yellen was appointed as vice chair in October 2010, she was President and CEO of the Federal Reserve Bank of San Francisco from 2004 and 2010 and also served as chair of the Council of Economic Advisors from 1997 to 1999. Prior to joining the Fed, Yellen spent much of her time as a professor at the University of California at Berkeley, where she had been teaching since 1980.

Path Ahead

A close proponent of the Q.E, she has been a key architect of the Fed’s efforts under Bernanke to keep interest rates near record lows to support the economy. These include the Fed’s monthly bond purchases and its guidance to investors about the likely direction of rates. “I commend President Obama on his selection of Dr. Yellen to be the first woman to serve as Federal Reserve Chairman,” said Senate Banking Committee Chairman Tim Johnson, in a statement late Tuesday. “She has a depth of experience a second to none and I have no doubt she will be an excellent Federal Reserve Chairman” he said. The current vice-chairwoman of the Board of Governors of the Federal Reserve System is married to Nobel Prize winning economist George Akerlof, whom she met in 1977, when they were economists at the Fed board- they married the following June and left the Fed to teach at the London School of Economics, their only son is also an economics professor in a renowned university.

Bernanke’s term ends in January 2014, completing an eight year tenure in which he helped pull the U.S. economy from its worst financial crisis since the 1930’s. Bernanke has led the Fed with some unconventional policies which have seen the economy recover, businesses prosper, lowering unemployment figures and credited for saving the U.S. banking system.

Unemployment Vs Inflation

Yellen, a distinguished economist subscribes to the Philipps-Curve-Model that trades off unemployment and inflation. In other words, rather than excess money creation as the cause of raising prices (which imbalances the economy), she focuses on the unemployment rate, the volume of new jobs being created and the growth of the overall economy. Lawrence Kudlow, an American economist who writes for various U.S. newspapers wrote on his blog that “If the Fed supplies more cash than the markets want, the inflation rate can go up whether unemployment is high or low. America has experienced this in the 1970’s when high inflation was accompanied by high unemployment” Kudlow, who is a proponent of supply side economics further elaborated “ The Fed is going to encounter excruciatingly difficult problems as it deals with withdrawing its Q.E-3, markets should be the guideposts for these decisions, not the unemployment rates” he says. “She is a very able economist; he concedes but warns “if you work from the wrong money model, you are likely to get the wrong money results”. However, Nathan Sheets, former head of the Fed’s division of International Finance said “Janet Yellen would be a vigorous proponent of the dual mandate. “The quest to appropriately balance the legs of the dual mandate, in the face of a disappointing recovery, is the primary challenge that Yellen would face” as Fed chairman.

But, Yellen strongly backs her theory of to stabilize output and boost employment when capitalism fails, a views she strongly favours and shaped by late Nobel laureate James Tobin at Yale University in New Haven, Connecticut, where she obtained her P.hd Degree in Economics. Yellen, who began her career as a “staff economist” in 1977 in the Fed’s division of International Affairs has profound knowledge in labour economics- she along with her husband George Akerlof  have co-authored more than a dozen papers that delved into the mechanics of how people switch jobs and what it means when workers perceive their wages as unfair.

Our View

Known as a “dovish” policy maker in the Wall Street, a person who is more permissive on inflation and tilted towards boosting employment, she is the most deserving candidate to the Fed’s chair. Apart from her academic experience, she has more than a dozen years in the Fed as a policy maker, in her speeches she frequently refers to model and simulations showing her expertise to deal rationally in difficult scenarios. The appointment of Yellen who will continue Q.E- is also a welcome move to emerging nations particularly – Brazil, Indonesia and India whose national currencies have plummeted due to Fed decision to taper its bond purchases.

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