The Week In Hindsight, 21 March 2014
After posting a modest recovery throughout much of the week, the FTSE 100 faltered on Thursday following a weak overnight performance from the Dow Jones, and in response to the FOMC press conference held late on Wednesday.
It was here that Janet Yellen announced the decision to continue tapering the rate of asset purchases, despite the weaker data that has continued to emerge from the US over February and March.
The conference came as markets shrugged off the weekend vote in Ukraine which paved the way for Russia to annex Crimea and monetary policy, along with economic data releases, got back into the driving seat as the predominant force behind price action .
It is worthy of note that much of the recent discussion surrounding the Fed’s QE program has begun to steer away from questions relating to whether or not the FOMC will continue to taper, and has instead veered toward the subject of interest rates and when the first increase will be likely to occur.
This gradual shift in focus was illustrated once again on Wednesday in the persistent questions directed to Janet Yellen by the media. It was during question time that, in a rare moment for a Chair of the Federal Reserve, Janet Yellen was pushed to give an indication of the likely time horizon between the end of tapering and the first hike to the Federal Funds rate.
Yellen’s response was that:- “although the term, a considerable period, is hard to define; it is probably in the region of six months or something like that”.
Should the current pace of tapering be sustained then the program would be expected to come to an end in December 2014. If Yellen’s statement is correct, this places the first interest rate rise somewhere in Q3 2015; much earlier than any previous forecast to date.
The fact that both markets and policy makers have now begun to look past the winding down of QE confirms our earlier view that the beginning of tapering also heralded the beginning of the end for an era of ultra low interest rates.
Our view from here is that, although rates are likely to rise ahead of the time that many have previously expected, Q3 2015 is premature. It is more likely that Yellen’s recent comments are the first of many to come, and that these will form part of a sustained effort to condition investors toward an eventual rise in rates, much the same as what took place throughout the run up to the Federal Reserve’s decision to taper.
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