Is the Fed on hold for the next two years?
A lot of folks think so. Bill Gross of PIMCO noted that the two-year Treasury Note is essentially predicting that Fed policy will be unchanged until mid-2012. Jim O’Neill of Goldman Sachs thinks the Fed won’t raise short rates until almost 2013, a year and a half away
We know market economists are paid to make predictions, and that the structure of the Treasury market implies a rate forecast, but this is nuts! No one knows what the economy will do 6 months from now, let alone three times that time-frame. What the Fed has always said is that future policy depends upon the economy’s direction. If the economy accelerates, they’ll raise rates. It’s that simple.
This is rather amusing. Six months ago there was almost universal consensus that the next direction of rates was higher. The general opinion was that the massive stimulus would prime the Keynesian pump and jump-start the economy. Interest rates would then have to rise. Besides, they couldn’t fall any more. Right?
But the market never seems to act according to plan. Since everyone expected rates to go up, they went down. Now that everyone now expects rates to go down, will they go up? Time will tell.
Amid the current ambiguity, one thing is sure: Bernanke was right when he called the outlook uncertain. But he was totally wrong when he said that such a state was unusual.
Douglas R. Tengdin, CFA
Chief Investment Officer
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