The Week In Hindsight, 23 May 2014

The FOMC sent US markets rallying this week as minutes from the most recent meeting of policymakers showed the subject of normalising policy officially being tabled. This saw a range of issues debated “out of prudence”, including the reinvestment of coupon payments to the Federal Reserve, the final conclusion to QE and the first eventual rise in interest rates.

FOMC voting member Dudley was recorded as saying that interest rates could remain substantially below the 4.25% level that they have averaged over recent times when inflation has been running at, or close to 2%. This was while Ben Bernanke, the former Fed Chairman, was reported by US media to have told dinner guests that he does not expect to see the Federal Funds rate back above 4% within his lifetime.

Regardless of which policy maker is on que and which is not, both comments are positive for equities over the longer term. This is because in the short term, the idea that the economy is in a healthy enough position to consider raising interest rates is positive for earnings and growth. The prospect of rates remaining lower for a longer period of time relative to their historical levels is also a plus, as this encourages yield seeking behaviour which will naturally support further inflows into stocks.

Away from the realm of monetary policy the week was pretty quiet for the US economy. Thursday’s data showed that unemployment claims unexpectedly rose the week previously while housing data for April pointed toward sales activity remaining muted.

Next week brings the second round of US Q1 GDP figures, consumer confidence numbers and more home sales data. Overall, we expect next week’s GDP to confirm that output was below par during Q1 while we look to see a rebound in consumer confidence following two month’s of false starts.


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