- Fed Vice Chairman Fischer, a bit more negative on supply potential of labour market…
- …while hawkish member Fisher suggests FOMC is shifting his way…but Chair Yellen will be key
- Japanese investors adjust govie portfolios: out of Germany towards France, the US and back home
The debate in the FOMC looks to be heating up
Although FOMC statements illustrate a consensus that there is significant labour market slack allowing rates to remain on hold for a ‘considerable period’ after asset purchases end, there seems to be a bit more of debate within the FOMC about this. In the past few days, the Vice Chairman of the Fed, Stanley Fischer and the Federal Reserve Bank of Dallas President, Richard Fisher have discussed a number of issues that will play a key role in determining the timing of the next rate increase.
Interesting insights from the two Fis(c)hers
Yesterday, during a conference sponsored by the Swedish Ministry of Finance, Stanley Fischer struck an uncertain tone regarding the extent to which structural factors where hindering the US recovery. This is unusual since in the past (before he was appointed Vice Chairman), he was outspoken in arguing that the fallout from the economic crisis showed the need for aggressive central bank actions. In his most recent intervention, we sense he is taking a more nuanced position. His speech focused on the difficulty for policymakers in disentangling demand and supply factors to assess the labour market. Mr Fischer’s sounds more open to the idea that the underperformance of the economy reflects permanent features (such as the low labour market participation rate, rate of investment and growth in productivity) as well as cyclical factors. Meanwhile, during an interview on 5 August, the Dallas Fed President suggested that he didn’t dissent at the July meeting because other Fed officials are coming around to his (relatively hawkish) view. He claims that he is now “…comfortable to where the FOMC is going”.
Janet’s the boss
An important point to remember in judging these comments is that the FOMC has historically not been as democratic as it sounds, with the Chairman’s view being quite dominant. Chair Janet Yellen has up until now been one of the more dovish FOMC members. She has argued strongly that much of the weakness in the labour market is cyclical and can therefore be tackled by loose monetary policy. It seems that she is sticking to a dovish stance for now. We think her tone will shift but slowly, and expect the FOMC to gradually move towards raising rates next year, probably around June.
Japanese investors shift government bond holdings
Recent data suggest that Japanese investors have been conducting a significant rotation of their government bond holdings. Japanese investors were net sellers of eurozone government bonds in the first half of 2014, but there were big shifts in composition. More specifically, Japanese investors bought more than 20bn EUR of French government bonds in May and June 2014, and increased their net stock of French debt by 14bn EUR in the first half of 2014. The most probable reason for choosing to increase holdings of OATs is the positive spread over German benchmark bonds, the lesser risk involved when compared to peripherals and the high market liquidity. Next to this, Japanese investors were modest net buyers (2.5bn EUR) of Italian government bonds in the first half of 2014, particularly in April and June 2014. The ongoing improvement in sentiment towards the periphery triggered Japanese investors to be net buyers of BTPs for the first time since 2011. The increased stock of Italian and French bonds have been at the expense of lower yielding core European bonds, most notably Germany and to a lesser extent the Netherlands. The on-going selling of bunds took the cumulative net reduction in German government bond holdings to 33bn EUR for 2014. Japanese investors bought USTs but the net buying (around 6bn EUR) is nowhere near the outflow from European government bonds. Indeed, the outflow from Europe largely reflects repatriation (please see our Rates Watch note published yesterday for more on this).