If you have stocks or bonds then you should be acutely interested in the FED right now

Time for an exit strategy?

Last Wednesday’s prepared testimony by Fed Chairman Ben Bernanke to the Joint Economic Committee of Congress seemed to start with an effort to silence recent chatter about the Fed’s so-called "exit strategy", i.e. the "tapering" off of its quantitative easing program.

"A premature tightening of monetary policy could lead interest rates to rise temporarily, but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further". Obviously. Pretty much an undeniable truism.

But then, in response to a question from the Committee, he stunned the markets with what seemed like a complete volte face, when he commented that the Fed could cut the pace of asset purchases,"in the next few meetings", sending 10 –Yr US Treasury yields through the 2 per cent barrier for the first time since they fell through the floor on 15th March on news of the first, ill-conceived version of the Cypriot bail-in.

Then, later that evening, the minutes of the most recent meeting of the Federal Reserve’s monetary policy committee, the FOMC, informed us that, "…. a number of participants favored tapering, (of Quantitative Easing), as early as June if incoming information suggested sufficiently strong and sustained growth at the time", although "views differed on the likelihood of that outcome".

It’s certainly the case then that the FOMC as a body has tilted towards removal of the "punch bowl’", as evidence that the "party" is hotting up becomes more widespread. Sure,  the big-guns, Bernanke, New York Fed President Dudley and Vice-Chairperson Yellen are inveterate doves, but there is a vociferous contingent of more-hawkish voters, (and non-voters), and when the Committee undergoes its annual rotation of regional Fed President voters next January, the balance will become distinctly more "hair-shirt"; if you assign a rating to each voter using a scale with 0 for dovish, to 5 for hawkish, and aggregate the changes, then I’d say it’s 10 "out"and 16 "in". Markets will begin to discount this soon.

This may all seem pretty arcane stuff and you may think that unless you’re a bond trader you needn’t really pay too much attention to such detail. ABSOLUTELY NOT; if you have investments of any sort in stocks, bonds, (of course), or commodities, then you should be acutely interested, as there is nothing which has contributed to rallies since March 2009 so much as the Federal Reserve’s largesse.

So what is the Fed up to? My view would be that they know QE has played a highly significant role in powering markets higher, they fear bubbles, they fear the reaction when they start to tighten, but they know it’s much like a visit to the dentist-the longer you put it off, the more painful the consequences.

Above all perhaps, they fear a repeat of 1994, when unexpected tightening caused a bond market rout.

So they’re trying to let us know as subtly as possible that they’re thinking about making a dentist’s appointment, and that means the rallies probably only have a month or two to run.

Photograph: Getty Images

Chairman of  Saxo Capital Markets Board

An Honours Graduate from Oxford University, Nick Beecroft has over 30 years of international trading experience within the financial industry, including senior Global Markets roles at Standard Chartered Bank, Deutsche Bank and Citibank. Nick was a member of the Bank of England's Foreign Exchange Joint Standing Committee.

More of his work can be found here.

Photo: Getty
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Here's something the political class has completely missed about Brexit

As Hillary Clinton could tell them, arguments about trade have a long, long afterlife. 

I frequently hear the same thing at Westminster, regardless of whether or not the person in question voted to leave the European Union or not: that, after March 2019, Brexit will be “over”.

It’s true that on 30 March 2019, the United Kingdom will leave the EU whether the government has reached a deal with the EU27 on its future relationship or not. But as a political issue, Brexit will never be over, regardless of whether it is seen as a success or a failure.

You don’t need to have a crystal ball to know this, you just need to have read a history book, or, failing that, paid any attention to current affairs. The Democratic primaries and presidential election of 2016 hinged, at least in part, on the consequences of the North American Free Trade Association (Nafta). Hillary Clinton defeated a primary opponent, Bernie Sanders, who opposed the deal, and lost to Donald Trump, who also opposed the measure.

Negotiations on Nafta began in 1990 and the agreement was fully ratified by 1993. Economists generally agree that it has, overall, benefited the nations that participate in it. Yet it was still contentious enough to move at least some votes in a presidential election 26 years later.

Even if Brexit turns out to be a tremendous success, which feels like a bold call at this point, not everyone will experience it as one. (A good example of this is the collapse in the value of the pound after Britain’s Leave vote. It has been great news for manufacturers, domestic tourist destinations and businesses who sell to the European Union. It has been bad news for domestic households and businesses who buy from the European Union.)

Bluntly, even a successful Brexit is going to create some losers and an unsuccessful one will create many more. The arguments over it, and the political fissure it creates, will not end on 30 March 2019 or anything like it. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to domestic and global politics.