jueves, 19 de marzo de 2015

jueves, marzo 19, 2015
Central Banks

Fed to Markets: No More Promises

Move away from explicit interest-rate guidance could unnerve investors used to some measure of clarity

By Jon Hilsenrath

Updated March 17, 2015 7:16 p.m. ET



The Federal Reserve is about to inject uncertainty back into financial markets after spending years trying to calm investors’ nerves with explicit assurances that interest rates would remain low.

Ahead of their policy meeting that ends Wednesday, Fed officials have signaled they want to drop the latest iteration in a succession of low-rate promises—a line in their policy statement pledging to be “patient” before deciding to raise rates.

The move could be a test for investors. In theory, less-clear-cut interest-rate guidance from the Fed should lead to more volatility in financial markets. That’s because investors will be left less certain about a key variable in every asset-valuation model: the cost of funds.            

 
Christine Lagarde, managing director of the International Monetary Fund, warned Tuesday that markets could be heading for a repeat of the 2013 “taper tantrum,” in which stocks fell and interest rates rose around the world as the Fed considered winding down its “quantitative easing” bond-buying program.

“I am afraid this may not be a one-off episode,” she said of 2013 in a speech at India’s central bank.

“The timing of interest-rate liftoff and the pace of subsequent rate increase can still surprise markets.”

The central bank for years has been using carefully chosen words about the likely level and direction of short-term rates as policy tool, hoping promises about the future will influence other borrowing costs today, such as the level of long-term rates on mortgages or car loans.

More investors are betting the Fed will raise short-term interest rates as soon as June, shrugging off signs that the U.S. economy is reverting to sluggishness. Colin Barr joins MoneyBeat. Photo: Getty

The approach has become particularly important since December 2008, when the Fed pushed its benchmark federal funds rate to zero amid the financial crisis and began promising it would stay there for an extended period.

With the labor market healing and inflation expected to move back toward their 2% target, Fed officials hope they’re ready to move on, at least rhetorically. They see this as progress—before they believed the economy was so weak they shouldn’t signal rate increases were anywhere on the horizon.

In addition to signaling that the Fed expects to consider raising rates later this year, the move away from a patience promise is part of the central bank’s broader effort to avoid pinning itself down in the future. Fed officials themselves are uncertain about when to start the process of raising rates and want flexibility to respond to new information about how the economy is evolving.

Right now measures of market volatility are sending divergent signals.

Stock-market volatility is relatively subdued.

The Chicago Board Option Exchange’s stock volatility index, for example, has averaged 17 this year, above last year’s 14 but below its average of 21 between 2009 and 2014. The higher the measure, known as the VIX, the more volatility.

At the same time, however, measures of short-term interest rate and currency volatility have picked up, a potential warning sign of tumult to come. Merrill Lynch’s MOVE index, which tracks expected interest-rate volatility, has risen to levels seen in 2013, when the taper tantrum started.

Torsten Slok, chief international economist at Deutsche Bank Securities, said this rate volatility portends broader turbulence.

“The risk here is that when volatility goes up in rates it will be spilling over into other asset classes,” he said.

Such turmoil could affect other borrowing costs for U.S. households and businesses, such as rates on mortgages, credit cards and corporate bonds. It could also hit their stock portfolios and 401(k) saving accounts.

A generation ago central bankers prided themselves on silence and obscurity.

“I spend a substantial amount of my time endeavoring to fend off questions and worry terribly I might end up being too clear,” former Fed Chairman Alan Greenspan joked in 1995.

But Mr. Greenspan began experimenting with interest-rate guidance in 2003, when inflation was low and the job market soft. The Fed offered an assurance to investors that short-term rates—then 1%—would remain low for a “considerable period.”

When the Fed started raising rates in 2004, it kept reassuring investors it would move them up at a “measured pace” and proceeded to raise its benchmark rate by a quarter percentage point at 17 straight meetings. Fed officials, afraid of market turmoil, wanted to tamp down the market’s reaction to the beginning of rate increases.

Mr. Greenspan’s successor as Fed chairman, Ben Bernanke, at times moved more aggressively than expected with short-term rate cuts in 2008. He then adopted assurances they would stay low, hoping such language would hold down long-term interest rates to provide an added boost to a damaged economy in need of stimulus. The Fed also wanted to be more transparent about its thinking.

Now, as the economy improves, Fed officials hope, the stimulative boost from low-rate promises has become less necessary.

Officials today see a fine line between transparency and tying their hands. Many believe the Fed’s “measured pace” guidance during 2004 to 2006 was a mistake, because it locked them in to predictable rate changes and betrayed their own uncertainty about the outlook.

Fed officials now believe the central bank needs to be able to alter its pace of rate changes as the economy evolves. “We’d probably not like to repeat a sequence in which there was a measured pace and [quarter-percentage-point] moves at every meeting,” Fed Chairwoman Janet Yellen said in a December press conference. “I certainly don’t want to encourage you to think that there will be a repeat of that.”

They have other misgivings about the guidance they’ve given in the past. One is an appearance that they are tied to specific dates for action.

“There is no good reason that I can see for us to have to telegraph every action that we need to take,”

Fed Vice Chairman Stanley Fischer said in February. 

Still, in practice, moving toward vaguer guidance about interest rates could be a challenge for the Fed.

Even when officials have in the past tried to move away from telegraphing their actions, they have found themselves drawn back to behaving in highly predictable ways.

In winding down the bond-buying program known as quantitative easing in 2014, for example, the Fed said the pace of its actions would depend on the performance of the economy. Economic output varied sharply in 2014—contracting in the first quarter and then expanding at an annual rate near 5% in the middle of the year—but the Fed reduced its monthly bond purchases in steady increments.

In December, some Fed officials wanted to eliminate rate guidance altogether. Instead, the central bank made a nuanced shift from an assurance rates would stay low for a “considerable time” to an assurance of patience before rates rise.

Ms. Yellen said in December the patience promise meant the Fed was unlikely to raise rates at its subsequent two meetings. If the phrase appears in the statement Wednesday, it would rule out a rate increase at the next meetings in April and June. It is likely to be dropped because several officials have said they want to consider a June rate rise.

Jeremy Stein, a Harvard University economics professor and former Fed governor, sees a conundrum brewing for officials. Even if the central bank says its actions will be less predictable, the market will infer a rate path from its actions.

To avoid unsettling markets, he said, Fed officials have an incentive to stick to the path investors infer.

“It is a hard thing to manage. You almost have to psyche yourself up to not worry too much about spooking the bond market,” he said.

Donald Kohn, a Brookings Institution fellow and the Fed’s former vice chairman, noted that investors will still be getting plenty of clues from the Fed about the outlook, even after dropping the patience pledge.

Fed officials’ quarterly economic forecasts include projections of interest rates in the future. Though not the official policy, these forecasts are an indication of what Fed officials themselves expect.

Meantime, the Fed’s policy statement contains other hints that aren’t going away, including yet another reassurance that rates will remain below their longer-run averages “for some time.”

“We’re not moving to a regime which is totally devoid of guidance,” Mr. Kohn said.

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