Indeed, by recent standards of media coverage and the ever rising stars of modern central bankers, it was barely visible. The main reason for this is that there was once more, no change. The reasons given by the MPC, who once again voted 8 to 1 to keep rates steady were roughly the same as they were the previous month. And, the Fed minutes, if they did anything, was to muddy the waters further as to when a rate hike might be forthcoming.
As Brad McMillan, Chief Investment Officer for Commonwealth Financial told Reuters: “You’ve got an absence of bad news and arguably some good news in there. Given the news since then, if they were willing to wait then for inflation to come back they’re even more willing now.”
The problem with this is that there is a growing concern that the much vaunted ‘data dependence’ on which the Fed has relied, especially if it now includes international data, could lead to inertia that will (or already has, depending on who you believe) leave them behind the curve when it comes to inflation.
During a panel discussion at PA Autumn Congress recently, Peter Fitzgerald, head of multi-asset at Aviva Investors, characterised it as such: “Draghi came out I think in 2012 and said, ‘We’ll do whatever it takes.’ You kind of get the sense now that Yellen is saying, ‘We’ll do whatever you want.’
He added, “My view on this is that, to some extent, the bubble that was created in housing in the U.S, which culminated ultimately in the crash of 2008, was driven by running ultra-low interest rate policy for, probably, longer than people should have done so. We will only know in a couple of years’ time, whether rates have been maintained at too low a level for too long, but my suspicion is they probably have been.”
Ben Lord, manager of the M&G UK Inflation Linked Corporate Bond Fund is even stronger in his view, telling Portfolio Adviser that the Fed has made a policy error by not raising interest rates sooner.
“Because the Fed has waited so long, we shouldn’t believe what we are being told about the path being gentle and gradual. In the early parts of next year people are going to see wages moving up, we are going to get into a strong, sustainable, consumption-led economic recovery, at which point the Fed will have the confidence to hike rates, and you are going to see wages continue to strengthen and employment continue to improve. Inflation will then start to emerge and we are going to very soon see they are well behind the curve,” he told Portfolio Adviser.
