By Roger J Kerr
Federal Reserve boss, Janet Yellen may have lost her “patient” mojo when it comes to managing monetary policy expectations in the US, however she remain super cautious on raising interest rates.
Weaker retail and manufacturing data of late in the US has caused the Fed and the markets to push out the timing of the first lift in short-term interest rates.
As always, the timing and extent of increases later in the year is highly dependent on the economic data over coming months.
When US short-term rates do commence their increases, the long term bond yields in the US can also be expected to lift with them, and thus the close correlation will in turn cause NZ swap rates past two years to increase in tandem.
The four key data points the Federal Reserve are monitoring to help their decision making on when to tighten monetary policy by increasing interest rates are pretty much identical to the economic variables RBNZ Governor Graeme Wheeler will also be closely watching:
|Economic variable||US Actual||
Threshold for Fed Action
|1||Unemployment rate||5.5%||5.0% to 5.2%||5.70%|
|2||Core inflation (excluding food and energy)||1.3%||1.50% to 1.70%||0.84%|
|3||Wage increases||2.0%||Above 2.4%||1.80%|
|4||Inflationary expectations (2 year ahead)||2.0%||Above 2.0%||1.80%|
The new wording for Fed watchers is “reasonably confident” that the above four economic indicators have reached their respective thresholds for change.
It may be only three to four months away.
Inflationary expectations in New Zealand (measured by survey) are hardly an accurate forward indicator for future inflation levels. Survey respondents just appear to mark inflationary expectations up and down based on the current actual inflation rate.
The measure is not that reliable or informative, so Governor Wheeler needs to be very skeptical about reading too much into this particular lead indicator (see chart).
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Roger J Kerr is a partner at PwC. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com