Fixed income investors speaking to GlobalCapital throughout the year have been highly critical of the vagueness adopted by the central banks over a decision that most regard as vital to their long and medium term business strategy.
A further lack of clarity was in evidence on Monday, when James Bullard, president and CEO of the St Louis Fed, indicated that one interest rate hike was likely to be all that the Fed needs for the time being and that “low interest rates are likely to continue to be the norm over the next two to three years.”
However, he posited this view with the statement that the St Louis Fed’s rate path projection “was much flatter than the rest of the committee”.
Once again this muddies the message coming from the US’s top central bankers, as one rate rise for the foreseeable future goes against its seemingly long position of a gradual strategy of incremental rate increases.
Despite this, it does not change the dynamic for a rate rise this year, given that Bullard has been hawkish about a 2016 hike and there is no indication that his “one and done” sentiment does not refer to the December meeting.
The market is now pricing a 72.5% chance of a December rate rise and the Fed should use this sentiment to assert that it will, short of a complete economic meltdown or at least severe shock, make the move at December’s Federal Open Market Committee meeting.
It is now a golden opportunity to make clear to markets what the short-term future of rates is going to be. But the central bank should also make clear in the next few months what the direction for next year will be as well.
Rate increases make funding costs more expensive and costs investors real money when they are tied in to fixed rate asset classes.
Most of the US economy has also spent the decade since the start of the crisis dependent on the cheap borrowing costs of the lower for longer era.
This has, in the minds of some, created a fairly fragile leverage bubble. The fragility of this bubble should be at the forefront of Fed Chair Janet Yellen’s mind and should arguably be more of a prominent concern than what often seems a fairly arbitrary inflation target of 2%.
If the Fed falters and the bubble bursts, a severe recession or downturn becomes more likely, and — given where we sit in the US credit cycle — transparency over the future of the economy is vital.
Markets, borrowers and the US economy need stability and a degree of certainty over its medium-term future. Interest rate risk now ranks as one of the highest corporate concerns in the US, and that is undoubtedly a result of the Fed’s lack of clarity rather than the underlying risk of what would probably be a 25bp rate hike.
The message should be clear to the Fed: lay out a plan and stick to it. Otherwise the little trust that markets have in the statements emerging from the world’s most important central bank will dissipate entirely and the economy as a whole will pay the price.