Investors have started to question whether all the necessary conditions will ever be in place for this Federal Reserve (Fed) to begin tightening monetary policy after last month's FOMC rate decision (or maybe better labeled "indecision" after several FOMC members appeared to immediately backtrack from the dovish tone of the September FOMC statement).
Fed Chair Yellen's press conference comments that the Fed is "focused particularly on China and emerging markets" created even more uncertainty about the future course of monetary policy. Uncertainty regarding Fed policy has now reached a point where officials from the same emerging market countries supposedly being helped by our zero interest rate policy urged Fed Vice Chairman Stan Fisher in Peru last week to "just do it" regarding Fed liftoff.
This week's chart tracks fixed income market expectations for time remaining before the Fed begins to tighten monetary policy. Markets have been consistently pricing in Fed liftoff to occur sooner than reality. Investors are now left to question whether the markets will be in a permanent state of "hurry up and wait," expecting Fed liftoff to be just around the corner.
Key Takeaway: In the process of trying to provide more transparency to the financial markets, mixed messages from the Federal Reserve have only confused investors. The equity market sell-off immediately following the September Fed rate decision is one sign of its eroding credibility. Fed officials must begin to provide a more consistent message to the markets about the conditions necessary to begin liftoff and when the U.S. economy will be strong enough to withstand short-term interest rates above zero.
The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.
This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
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