Policymakers would rather we didn’t worry about the longer-term inflationary consequences of their unconventional monetary policies. Yet we do. What’s more, a growing number of voices out there appear to be looking at long-term yields and worrying too.
H/T to Alea for referring us to the current overnight-indexed-swaps (OIS) strip as it stood on May 13th:
1-Month: 20 bp
3-Month: 21 bp
6-Month: 25 bp
12-Month: 40 bp
2-Year: 82 bp
5-Year: 210 bp
10-Year: 298 bp
Note the jump from two to five-year rates.
Meanwhile, John Taylor, the former Treasury official who devised the ‘Taylor Rule” told an Atlanta Fed conference in Jekyll Island, Georgia on Tuesday (via Bloomberg):
My calculation implies we may not have as much time before the Fed has to remove excess reserves and raise the rate,
The Taylor Rule, FYI, is a formula for rate-setting based on the outlook for inflation and growth.
And now, speaking in London on Wednesday, Bundesbank president Axel Weber made not dissimilar critical references on exit strategies when referring to a “maximum” €60bn of covered bond purchases being implemented by the ECB. As Barcap’s Julian Callow sums up:
Bundesbank President Weber stressed that while the “enormous expansionary stimulus” was “currently warranted”, it would have “to be reduced or even inverted very quickly as soon as the overall situation improves”. He gave two reasons for focusing on a rapid exit strategy: (1) “part of the monetary stimulus will remain in the pipeline for some time due to the usual lags of monetary transmission”, and (2), “there is a possibility of the recovery taking place in a more dynamic way than currently expected”. He argued that there was a risk that inflationary risks could make “a rapid and powerful comeback”.
Also of interest, in his speech he referred to the Governing Council as having agreed to “outright purchases of covered bonds up to a maximum amount of 60 billion euros”. Use of the word “maximum” here is new and suggests to us that he was deliberately seeking to distance himself from the surprising comments by Slovenian Governor Kranjec in a Bloomberg comment yesterday (one might conclude that the issue of how much further, if at all, to undertake new “enhanced credit support” measures such as private sector asset purchase continues to be a sensitive and controversial one for the Council).
Which leads us to wonder; when is a recovery not a recovery? Or rather, when is a shift from a deflationary environment into an inflationary environment misinterpreted as a recovery? Could it be now?
After all, it just doesn’t seem right for senior central banking officials to talk of a “recovery taking place in a more dynamic way than currently expected” while simultaneously applying a negative connotation to the term “recovery”.
Related links:
TIPS for China on its dollar problem – FT Alphaville
UK lenders increasing mortgage rates – FT Alphaville
Down yields down! – FT Alphaville
Higher yields do not mean normalisation – FT Alphaville