Markets guessing Yellen’s tune
Definitive date for US rate hikes was about as likely as news on Lorde’s new album
After all the hype, US Federal Reserve chairwoman Janet Yellen’s speech at the central bankers conference in Jackson Hole on Saturday yielded few clues as to the release date of Lorde’s new album.
Those looking for a definitive call on the Kanye West/Taylor Swift feud were also left deeply disappointed. Any biases were highly nuanced and coded in the subtle language of monetary policy.
If anything Yellen appeared to be wilfully ignore these issues saying: “My focus today will be the policy tools that are needed to ensure that we have a resilient monetary policy framework.”
It was a smart approach because as much as we might will them to, central banks can’t pick markets any more than they can pick pop hits.
We were always about as likely to get a definitive date for the resumption of US rate hikes as we were to get any news on Lorde.
The beauty of central banking language is that it is subtle and coded and goes out of its way to avoid definitive statements. But the risk is that you can read almost anything you want into it if you are not careful.
In the end Yellen did enough to fulfil market expectations of the Federal Reserve’s new confidence in the US economy.
The speech has been widely interpreted as shifting the time frame for US rate hikes forward. Odds now favour December, although a hike in September is possible.
As ASB economists noted in their report, the odds of a September rate hike have since doubled from 15-20 per cent last week to 36 per cent and odds of a rate hike in December moved to 60 per cent from 50 per cent.
That matters a lot for New Zealand. Even more than the arrival of Lorde’s new album — possibly.
When US rates start rising there will be downward pressure on the New Zealand dollar. That could boost inflation, improve our export competitiveness and would generally
Even between now and the next US rate review in mid-September there is plenty of time for new events and new data to derail the process.
take the pressure off the Reserve Bank of New Zealand to cut rates when it would rather not add fuel to the housing market bubble.
Reserve Bank governor Graeme Wheeler would have been relieved by the tone of Yellen’s speech and the subsequent market reaction, ASB’s economists wrote.
An optimistic view would be that fresh US rate hikes could signal the beginning of the end for the monetary madness we’ve seen around the world in the past two years.
They would certainly be a step towards the resumption of normal play.
Already in the past couple of days the US dollar has risen and the kiwi is down about US1c.
But Wheeler will be well aware that December is still a long way off.
Even between now and the next US rate review in mid-September there is plenty of time for new events and new data to derail the process.
There’s also a “cry wolf” problem emerging for the US Fed, which has been talking about a return to higher rates for more than two years.
If you looked closely at the speech Yellen was — like all good central bankers — still hedging her bets: “. . . our decisions always depend on the degree to which incoming data continues to confirm the committee’s outlook.” For example, there are key US job numbers due this Saturday. If they are strong then expect to see the markets go crazy on the prospect of September cuts. If they are bad then scepticism about the prospect of hikes this year will grow. The reality is that hiking rates happens when it happens, just like Lorde’s album will arrive when it arrives. Whether we choose to obsess over the pop star’s Instagram feed or the language of Janet Yellen’s speeches there is no getting around the fact that we are going to have to wait and see.