Article published on LinkedIn on 20 June 2014

I’m touring in Asia for ten days meeting clients in Singapore, Jakarta, Hong Kong and Shanghai. Amongst the frequently asked questions, two dominate: how concerned should we be about the slowdown in China (a question very much related to the property market) and what can we expect from the Fed? On the latter, the question is about the timing of the first rate hike and the aggressiveness of the tightening cycle. Merely the fact that this question is posed so often in Asia underlines the global impact of decisions taken in Washington DC. The Fed has been using words and numbers to reassure investors that the move towards higher rates would not spoil the party: the tone of recent speeches has been predominantly dovish and the published forecasts suggest that the pace of tightening will be slow. For the time being, this message has not been tested by any particularly strong economic data , although James Bullard’s recent speech about how close the Fed is to its policy targets in terms of inflation and unemployment did constitute a wake-up call: if we’re that close, why are we so far away from normal policy rates? Investors know that one day, the monetary policy environment will no longer be supportive but as long as the party lasts, the rational party-goer is keen to enjoy it. In financial market terms, this pushes up valuations, triggering worries that when the tone changes from dovish to slightly hawkish, the correction in equities, government and corporate bonds will be all the more brutal. From that perspective, a more ambiguous communication on the policy intentions of the Fed would certainly spoil the party today but would imply less of a headache further down the road when the party stops altogether. The Bank of England has already made a step in this direction with Mark Carney turning hawkish in his recent Mansion House speech. I’m curious to see if and when the Fed will follow this example.

 

William De Vijlder

Vice – Chairman of BNP Paribas Investment Partners