In the first of his dispatches from a trip to New York, Head of Fund Research, Ben Gutteridge speaks to Rick Rieder, CIO of Fundamental Fixed Income at BlackRock.Subjects discussed include the outlook for monetary policy in both the US and Europe.

During her Humphrey Hawkins testimony, Federal Reserve Chair Yellen managed to sound both dovish and hawkish at the same time.  In her prepared remarks Dr Yellen said:
 



 
 
“The FOMC's assessment that it can be patient in beginning to normalize policy means that the Committee considers it unlikely that economic conditions will warrant an increase in the target range for the federal funds rate for at least the next couple of FOMC meetings. If economic conditions continue to improve, as the Committee anticipates, the Committee will at some point begin considering an increase in the target range for the federal funds rate on a meeting-by-meeting basis. Before then, the Committee will change its forward guidance.â€



During the question and answer session, however, she made some rather more hawkish comments.  Particularly she said that wages are a lagging indicator of improvement in the labour market. She observed that wages are improving and if they continue to improve that would add to her confidence that inflation is rising again.  She added that the committee needs to be forward-looking in setting monetary policy and is getting closer to full employment.

The most telling point would be that Dr Yellen noted that current policy is highly accommodative and that “these policies have been in place for six years now.† This seems to suggest that the Fed is keen to withdraw this stimulus if they judge that they are able to. That would partly be reloading the monetary gun, allowing them to deploy conventional monetary stimulus at some stage in the future. It would partly be because they wish to discourage financial risk taking.

Too much time is spent considering when the Fed will “lift off†with interest rates, however, and not enough is spent discussing the likely direction of interest rates thereafter.

There is a wide difference of opinion among Fed members over what the appropriate interest rates should be at various points in time. Rick Rieder had plenty to comment on this. 

Also discussed was the impact of the European bond buying programme which is greatly underestimated in terms of its scale.  In terms of new issuance this may be the most dramatic monetary expansion of all and it occurs at a time when bond yields are already low and there is a tremendous demand for yielding assets.

The view from BlackRock, therefore, is that monetary policy remains extremely easy, a point we have discussed in the past. There can be no doubt that this is supportive of asset prices and that the easiest policy continues to be associated with the weakest currencies.  There can be significant doubt over whether such policy is appropriate when labour markets have been tightening, and when we have seen expanding credit and money supply even in economic laggards like the Eurozone.

 

 

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