The Fed continues to sway over its QE policy

What's the cause of this oscillation?

If you listened closely after the US Federal Reserve’s surprising September policy announcement, you might have heard confused investors around the world saying, "Ben, you’ve lost us."

Fed Chairman Ben Bernanke reported that the US central bank had chosen to keep its $85-bn-per-month quantitative easing (QE) programme intact, a decision that starkly contrasted with the strong signals it sent in May that it would start winding down the open-ended QE effort that it had begun only nine months earlier.

US GDP growth, employment and inflation numbers have all been relatively consistent for the past year, so the seemingly wide swings in policy stance during that period have left the market with big questions about the Fed’s future direction.

Bond investors need to rapidly come to terms with this new source of market uncertainty, find ways to build portfolios that mitigate these new risks and take advantage of opportunities stemming from increased volatility when they present themselves.

Before we start parsing the Fed’s recent announcements, it is important to note how the signalling effect works within the Fed’s policy statements. The theory goes that if the market knows the Fed’s intentions, it will do some of the Fed’s work for it. For example, if the Fed says it plans to gradually cut rates over the next few years, businesses may start to ramp up hiring and spending well in advance of the actual rate cuts.

The market doesn’t really need to know exactly what the Fed will do with interest rates, but it does need to understand the general rules of how economic events will trigger Fed action. If we know, for example, that the Fed will hike rates when inflation rises above a certain threshold, we worry less about the Fed’s monthly announcements and focus simply on trying to forecast inflation. 

It’s exactly those rules of engagement that have been blurred by recent Fed decisions. In September 2012, the Fed announced a new open-ended QE programme that would continue until the economy achieved specific targets for inflation (2.0 to 2.5 per cent) or unemployment (6.5 per cent). This sent a clear signal to investors that they could build their Fed scenarios around their economic projections for inflation and unemployment.

Then in May 2013, the Fed reversed course and announced that it would likely start tapering its bond purchases "later this year", with an implication that tapering could begin in September. The market was taken aback by this announcement, as neither inflation nor unemployment had come close to hitting the Fed’s previously stated targets.

Finally, we heard in September that the Fed would leave its QE programme unchanged. Once again, the change in direction was not triggered by any big changes in economic data – if anything, data since May has progressed toward the Fed’s original goals, with a bump in inflation, a drop in unemployment and healthy results in manufacturing activity.

Since the Fed’s vacillations over the past year weren’t consistent with any shifts in the economic data they claimed to be watching, the market no longer knows what data the Fed thinks is important. Was QE3 designed for some other, non-stated purpose – to depress the dollar, or to offset fiscal budget tightening, or to buoy the stock market? Does the Fed see risks that it is not articulating publicly? We just don’t know.

Complicating all of this further is the fact that Federal Reserve Chairman Ben Bernanke is retiring in January, and President Obama has yet to nominate a successor. Investors need to be prepared for a wide range of 2013 outcomes, but also need to consider that Bernanke’s successor may chart a different course entirely for monetary policy in 2014 and beyond.

It all adds up to a market with no true compass for how Fed policy and economic reality interact, so we believe that the market’s recent spike in volatility and sensitivity to economic news is likely to become the norm rather than the exception going forward.

Building an investment thesis around the Fed’s short-term moves may be more difficult now, but it has always been difficult. We build our portfolios on fundamentals: we focus on identifying a select group of sturdy bonds from stable issuers, with attractive upside potential. This provides opportunity for total return but also provides the relative stability of bonds that will do well when held to maturity.

While this is an all-weather philosophy, we believe that our approach is particularly well-suited for this market. Whether it acts in 2013 or 2014 or 2015, the Fed will eventually reduce its monthly bond purchases and begin to hike interest rates. Given that, we are focused on shorter-duration bonds, as we have been for several years, to mitigate the potential impact of rising rates on our portfolios.

The yield curve is also exceptionally steep at the moment, meaning that the yield gap between very short-term and longer-term bonds is unusually high. We have positioned portfolios to benefit from this yield gap narrowing. Finally we keep a constant watch for moments when volatility produces opportunity.

In US municipal bonds, for example, fund flows have been persistently negative for much of 2013, as investors have reacted to rising rates as well as isolated solvency crises in Puerto Rico and the city of Detroit. The downward pressure on municipals across the board has enabled us to buy favoured bonds at attractive prices. We expect similar instances of market dislocation – and resulting opportunity – as we go forward in this uncertain period.

On the heels of the Fed’s recent communication breakdowns, the outlook for the bond market is more uncertain. Now more than ever, it’s important to focus on the factors we can control, and be ready to capitalise on opportunities that materialise when the market is blindsided by factors that, for the moment, no one can see clearly.

Thomas DD Graff, CFA is Head of Fixed Income at Brown Advisory

This piece first appeared in Spear's Magazine

Ben Bernanke. Photograph: Getty Images

This is a story from the team at Spears magazine.

Parliament TV screengrab
Show Hide image

MP Michelle Thomson's full speech on rape at 14: "I am a survivor"

The MP was attacked as a teenager. 

On Thursday, the independent MP for Edinburgh West Michelle Thomson used a debate marking the UN’s International Day for the Elimination of Violence against Women to describe her own experience of rape. Thomson, 51, said she wanted to break the taboo among her generation about speaking about the subject.

MPs listening were visibly moved by the speech, and afterwards Thomson tweeted she was "overwhelmed" by the response. 

Here is her speech in full:

I am going to relay an event that happened to me many years ago. I want to give a very personal perspective to help people, both in this place and outside, understand one element of sexual violence against women.

When I was 14, I was raped. As is common, it was by somebody who was known to me. He had offered to walk me home from a youth event. In those days, everybody walked everywhere - it was quite common. It was early evening. It was not dark. I was wearing— I am imagining and guessing—jeans and a sweatshirt. I knew my way around where I lived - I was very comfortable - and we went a slightly differently way, but I did not think anything of it. He told me that he wanted to show me something in a wooded area. At that point, I must admit that I was alarmed. I did have a warning bell, but I overrode that warning bell because I knew him and, therefore, there was a level of trust in place. To be honest, looking back at that point, I do not think I knew what rape was. It was not something that was talked about. My mother never talked to me about it, and I did not hear other girls or women talking about it.

It was mercifully quick and I remember first of all feeling surprise, then fear, then horror as I realised that I quite simply could not escape, because obviously he was stronger than me. There was no sense, even initially, of any sexual desire from him, which, looking back again, I suppose I find odd. My senses were absolutely numbed, and thinking about it now, 37 years later, I cannot remember hearing anything when I replay it in my mind. As a former professional musician who is very auditory, I find that quite telling. I now understand that your subconscious brain—not your conscious brain—decides on your behalf how you should respond: whether you take flight, whether you fight or whether you freeze. And I froze, I must be honest.

Afterwards I walked home alone. I was crying, I was cold and I was shivering. I now realise, of course, that that was the shock response. I did not tell my mother. I did not tell my father. I did not tell my friends. And I did not tell the police. I bottled it all up inside me. I hoped briefly—and appallingly—that I might be pregnant so that that would force a situation to help me control it. Of course, without support, the capacity and resources that I had within me to process it were very limited.

I was very ashamed. I was ashamed that I had “allowed this to happen to me”. I had a whole range of internal conversations: “I should have known. Why did I go that way? Why did I walk home with him? Why didn’t I understand the danger? I deserved it because I was too this, too that.” I felt that I was spoiled and impure, and I really felt revulsion towards myself.

Of course, I detached from the child that I had been up until then. Although in reality, at the age of 14, that was probably the start of my sexual awakening, at that time, remembering back, sex was “something that men did to women”, and perhaps this incident reinforced that early belief.​
I briefly sought favour elsewhere and I now understand that even a brief period of hypersexuality is about trying to make sense of an incident and reframing the most intimate of acts. My oldest friends, with whom I am still friends, must have sensed a change in me, but because I never told them they did not know of the cause. I allowed myself to drift away from them for quite a few years. Indeed, I found myself taking time off school and staying at home on my own, listening to music and reading and so on.

I did have a boyfriend in the later years of school and he was very supportive when I told him about it, but I could not make sense of my response - and it is my response that gives weight to the event. I carried that guilt, anger, fear, sadness and bitterness for years.

When I got married 12 years later, I felt that I had a duty tell my husband. I wanted him to understand why there was this swaddled kernel of extreme emotion at the very heart of me, which I knew he could sense. But for many years I simply could not say the words without crying—I could not say the words. It was only in my mid-40s that I took some steps to go and get help.

It had a huge effect on me and it fundamentally - and fatally - undermined my self-esteem, my confidence and my sense of self-worth. Despite this, I am blessed in my life: I have been happily married for 25 years. But if this was the effect of one small, albeit significant, event in my life stage, how must it be for those women who are carrying it on a day-by-day basis?

I thought carefully about whether I should speak about this today, and it was people’s intake of breath and the comment, “What? You’re going to talk about this?”, that motivated me to do it, because there is still a taboo about sharing this kind of information. Certainly for people of my generation, it is truly shocking to talk in public about this sort of thing.

As has been said, rape does not just affect the woman; it affects the family as well. Before my mother died early of cancer, I really wanted to tell her, but I could not bring myself to do it. I have a daughter and if something happened to her and she could not share it with me, I would be appalled. It was possibly cowardly, but it was an act of love that meant that I protected my mother.

As an adult, of course I now know that rape is not about sex at all - it is all about power and control, and it is a crime of violence. I still pick up on when the myths of rape are perpetuated form a male perspective: “Surely you could have fought him off. Did you scream loudly enough?” And the suggestion by some men that a woman is giving subtle hints or is making it up is outrageous. Those assumptions put the woman at the heart of cause, when she should be at the heart of effect. A rape happens when a man makes a decision to hurt someone he feels he can control. Rapes happen because of the rapist, not because of the victim.

We women in our society have to stand up for each other. We have to be courageous. We have to call things out and say where things are wrong. We have to support and nurture our sisters as we do with our sons. Like many women of my age, I have on occasion encountered other aggressive actions towards me, both in business and in politics. But one thing that I realise now is that I am not scared and he was. I am not scared. I am not a victim. I am a survivor.

Julia Rampen is the editor of The Staggers, The New Statesman's online rolling politics blog. She was previously deputy editor at Mirror Money Online and has worked as a financial journalist for several trade magazines.