US Interest Rates
Who leads whom in the interest rate market? Or as Eugene Fama asked it in a paper in 2013, does the Fed really control interest rates? The University of Chicago economist’s work concluded that there are a lot of forces affecting rates, where the Fed is only one small part. In fact — as this Chicago Booth comic illustration of the entire debate neatly summarises – his research concluded that up to 83 per cent of the Fed’s target rate is influenced by other short-term rates in the market.
As the Fed begins its crucial two-day meeting, Harbinger O’Doom has been delivering his prognostications on the effect of a rise in interest rates. FT Opening Quote, with commentary by City editor Jonathan Guthrie, is your early Square Mile briefing. You can
The FT has just published its big “When Rates Rise” package on the prospects of tighter US monetary policy. Of course, it remains far from certain that the Federal Reserve will act later this month – or even this year – but we thought a more visual guide would be appropriate. Back in the noughties, the global economy was growing at a healthy clip, and the finance industry was feeling great. Essentially, things were a bit like this.
In a previous post we noted Greenspan shouldn’t have been confounded by the “conundrum” he identified in 2005, and promised a longer explanation of this claim. To refresh, here’s the full argument he made during his semiannual testimony to Congress: Long-term interest rates have trended lower in recent months even as the Federal Reserve has raised the level of the target federal funds rate by 150 basis points. This development contrasts with most experience, which suggests that, other things being equal, increasing short-term interest rates are normally accompanied by a rise in longer-term yields.
China, you may have noticed, has switched rather abruptly from being a massive buyer of foreign currencies to a major seller. Some people — including some relatively influential policymakers — are worried that this switch from suck to blow, as it were, could cause Treasury yields to spike. That fear may be animating some of those who think the Fed should adjust its schedule of rate hikes, or even engage in additional large-scale asset purchases. We’re sceptical.
After a considerable period of boredom, trying to figure out America’s central bank has gotten interesting again. For months, the mid-September meeting of the Federal Open Market Committee was being telegraphed as the most likely start date of the “normalisation” process. Or, to use another bit of central banker-ese, the day when short-term interest rates would begin “liftoff” from the current range of zero to 25 basis points.
The Fed’s balance sheet is no longer in expansion mode, which means it’s time for post-mortems of the most recent asset purchase programme. (Our colleague John Authers has a very good round-up of what did and didn’t happen since QE3 began.) We want to focus on the fact that the most recent round of bond-buying seemed to have no inflationary impact. If anything, an observer of the data who had no preconceptions about monetary policy operations would conclude that QE3 was disinflationary. Alphaville writers have been exploring this possibility for years (though without firm conclusions). Let’s start by looking at the changes in actual inflation since the start of 2010.