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.

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Will Jeremy Corbyn stand down if Labour loses the general election?

Defeat at the polls might not be the end of Corbyn’s leadership.

The latest polls suggest that Labour is headed for heavy defeat in the June general election. Usually a general election loss would be the trigger for a leader to quit: Michael Foot, Gordon Brown and Ed Miliband all stood down after their first defeat, although Neil Kinnock saw out two losses before resigning in 1992.

It’s possible, if unlikely, that Corbyn could become prime minister. If that prospect doesn’t materialise, however, the question is: will Corbyn follow the majority of his predecessors and resign, or will he hang on in office?

Will Corbyn stand down? The rules

There is no formal process for the parliamentary Labour party to oust its leader, as it discovered in the 2016 leadership challenge. Even after a majority of his MPs had voted no confidence in him, Corbyn stayed on, ultimately winning his second leadership contest after it was decided that the current leader should be automatically included on the ballot.

This year’s conference will vote on to reform the leadership selection process that would make it easier for a left-wing candidate to get on the ballot (nicknamed the “McDonnell amendment” by centrists): Corbyn could be waiting for this motion to pass before he resigns.

Will Corbyn stand down? The membership

Corbyn’s support in the membership is still strong. Without an equally compelling candidate to put before the party, Corbyn’s opponents in the PLP are unlikely to initiate another leadership battle they’re likely to lose.

That said, a general election loss could change that. Polling from March suggests that half of Labour members wanted Corbyn to stand down either immediately or before the general election.

Will Corbyn stand down? The rumours

Sources close to Corbyn have said that he might not stand down, even if he leads Labour to a crushing defeat this June. They mention Kinnock’s survival after the 1987 general election as a precedent (although at the 1987 election, Labour did gain seats).

Will Corbyn stand down? The verdict

Given his struggles to manage his own MPs and the example of other leaders, it would be remarkable if Corbyn did not stand down should Labour lose the general election. However, staying on after a vote of no-confidence in 2016 was also remarkable, and the mooted changes to the leadership election process give him a reason to hold on until September in order to secure a left-wing succession.

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