Weekly: Fed adjustment advanced

by: Han de Jong , Nick Kounis

  • Big Picture: We judge that the US bond market has adjusted its expectations for monetary policy to realistic levels. This means that calm should return before too long. However, there is a risk that the rise in yields will acquire its own momentum and overshoot. In that case, higher borrowing costs might negatively affect the growth outlook and, sooner or later, market expectations for monetary policy will have to be adjusted down again. That could be a volatile process, with turmoil on financial markets continuing.
  • Eurozone: Business and consumer surveys rose further, adding to the evidence suggesting that the eurozone economy is stabilizing. However, the prospect of a slow recovery and subdued inflation suggests that the rise in euro short-term interest rate expectations – probably in sympathy with the Fed – is overdone.
  • US: In the press conference after last week’s FOMC meeting, Chairman Bernanke made it very clear that if the economy continues to improve it will be appropriate to moderate the pace of asset purchases ‘later this year’. Our view is that this will happen in December, but September is looking like an increasingly likely possibility.
  • Asia: China’s leaders showed their commitment to reducing surging credit growth when they initially decided not to inject broad liquidity to the banking system, despite a clear liquidity crunch. They finally relented in the end, but the message seems to be that the authorities are fairly relaxed about economic developments.


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