Equity markets continued their end of half-year correction, making it a disappointing end to what has been for many a disappointing first half of the year. Mark Carney was tackled this week by Members of Parliament, who believe he was giving mixed messages on what to expect from the Bank of England on interest rate policy. This disease seems now to be afflicting members of the Federal Reserve. Last week Janet Yellen was at pains to insist rates were going nowhere in the short term. Thursday saw St. Louis Fed President Jimmy Bullard describe U.S. jobs growth as “way ahead of schedule” and most data is suggesting the economy is getting stronger. When quizzed about the steeper than expected plunge in first quarter GDP he described it as aberration. He appeared to be paving the way for the prospect of the first rate rise in the first quarter of 2015, possibly slightly contradicting the message Janet Yellen delivered.
On Thursday, we attended a macro geopolitical presentation, the speaker’s opening remarks referred to many peoples’ view that Central Banks are targeting inflation, he believed that what they are targeting is growth, and we believe that rings true. Economic growth is ultimately what is needed to reduce the debt burden and that is why central bankers’ focus remains on achieving that.
In defence of central bankers, they have done a lot to help stimulate the global economy, and we remain in uncharted territory when it comes to the current level of interest rates. Liquidity remains abundant in the world despite it being reduced modestly in the past months, mainly as the Fed tapered its bond purchase program, even though this has been reversed slightly by the recent actions of the ECB.
Trying to manage the next phase, attempting to normalise rates and not undermine the work they have done so far, is never going to be easy. One thing investors should feel confident with is that central bankers having worked so hard to stimulate the economy and asset prices that they will be reluctant to move too quickly and damage the recovery. Ben Bernanke stressed this point when in charge of the Fed, and Janet Yellen is cut from the same cloth. Despite the best intensions of central bankers to clearly articulate their interest rate policy, it rather feels like this central bank teasing may continue for a while whilst they test investor and economic reactions to the possibility of rate changes.