It's all very well the Fed suddenly coming over all doveish but they're wrong, according to the big boys.....

Tuesday 22nd March 2016

It's all very well the Fed suddenly coming over all doveish  but they're wrong, according to the big boys.....

ref :- "BlackRock Says There Won't Be a U.S. Recession, Cut Treasuries" , Bloomberg online

ref : "Goldman : Global Coordinated Easing Won't Last, and the Fed Will Need to Hike Rates Four Times in 2016" , Bloomberg online

Whoops ..... all change again, is it? Just as we're trying to come to terms with the newly doveish stance taken by the Fed last week, two of the biggest names have let it be known that they're thinking rather differently about the prospects for the US economy as a whole and about rates in particular. If Chairwoman Janet Yellen and the Fed are genuinely concerned about the economy slipping back into recession , they have no need to be ..... so say BlackRock Inc. , the world's largest money manager. They're putting their money where their mouth is too, advising paring down positions in US Treasuries as steady growth in GDP and therefore inflation is likely to send yields higher and prices lower. Ms Yellen may quietly gain some comfort from the BlackRock report, even if the timing of it is a little awkward.

 Goldman Sachs Group Inc. go a lot further, and at the same time give some credibility to the theory that we looked at yesterday ..... that there was some kind of informal agreement at the G-20 meeting in Shanghai to slant monetary easing in such a way that it would not give an unwelcome boost to the US dollar. Hence easing strategies adopted by China, Japan and the Eurozone have focused less on slashing deposit rates even further, and more on other measures such as QE and reducing reserve requirements and lending controls.

At the same time, the Fed's newly doveish rhetoric is indicative of the role they've adopted as the World's Central Bank  --  in other words, it's policies are being shaped with the global economy in mind rather than a purely domestic one.

It can't last though, at least not according to Goldman. In a notably bullish assessment they argue that the easing of financial conditions across developed markets will succeed in stimulating growth. More to the point, the resilience of the US economy despite global headwinds and upward progress in core inflation will dictate that the Fed will not only be able to, but indeed be forced to, formulate its policy on the basis of domestic requirements. Goldman are a lot more confident of core inflation trending higher than Ms Yellen is, apparently, and they don't subscribe to the view that she has come over all wishy-washy about keeping a lid on it at 2.0%. 

If that is genuinely a misconception, and you take Ms Yellen's declaration that the Fed is not targeting an economic overshoot at face value (ie she will not allow labour markets and inflation to exceed their mandates), then it's going to require some pretty decisive action. In Goldman's view, that means four rate hikes this year. Yes, we're back to that ..... and it's a pretty bold call given that the Fed have already let the first opportunity pass by without giving the impression that they are in any hurry to start raising.

So how many rate hikes should WE expect in 2016 ? The Fed said four in December, then just a few weeks ago the markets said none. Now the Fed says two, but Goldman say four. Confused ? Maybe just undecided. Take comfort in the fact that the range of views amongst economic gurus encompasses just about any possible outcome, and a valid argument could be made for each and every one.