Roger J Kerr sees US rate rises just 3 or 4 months away. He is also very sceptical on 'inflation expectation' surveys, even the RBNZ's one

Roger J Kerr sees US rate rises just 3 or 4 months away. He is also very sceptical on 'inflation expectation' surveys, even the RBNZ's one

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 US Target/
Threshold for Fed Action
NZ Actual
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

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9 Comments

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Of course inflation expectations will reach a point where the Fed has to act, but when it does it will NOT have anything to do with this person's "analysis" (if reading Yellen's statements even counts as analysis). This columnist, along with most others on Interest,co.nz, have been harping on about inflation being just around the corner for years, and they have been flat out wrong that entire time. Some humility would be in order here, but of course it will not be forthcoming. A broken clock is still right twice a day but not because it was skilled enough to predict what time it would be.

Is  the "real" world economy  shrinking? And is it being swallowed up by the "dysfunctional economy" heavily reliant on monetary policy to prop it up.

I suspect so, I think "GDP" is a mislading figure.  What I'd like to see is GDP based on industry and agriculture ie something making a real tangible good so excluding services especially financial.
What I suspect then is we'd see that the financial services are actually parasitic and only appear to be propping up GDP by living off the actaul goods production.
 
 

The March Quarter CPI for NZ is forecast at minus .2%
This will be actual data rather than a survey of expectations. 
So will this be 'looked through'?  

-0.2%? that would be incredible, where did you get that from?  +0.6%, +0.5% yes.

You are quoting the Annualised CPI forecast, I think 
I meant the Quarter alone. 

Interesting interview by Jim Rickards who predicts no rate increases.
QE2 finished in June 2011, QE3 Started Sep 2012 (15 month gap)
QE3 finished Oct 2014, add 15 months perhaps QE4 will begin around Jan 2016. 

Roger since 2008? 2009? you have been warning of inflation and rising rates is just around the corner. After 7 years frankly you should be wondering why you are wrong every time you post "its coming"   Personally I think the financial "world" id disconnected from the real world and you are the poster boy for that. Now sure its possible we'll see rising rates and inflation one day, maybe.   The USA's economy is only enjoying a "boom" due to oil fracking,  which is now imploding (and low energy costs - Ngas).  So will the Fed raise? the Q is if it tries to, a) what will be the short tem effect and b) how long before they drop it again. c) will they.  So a small blip up and you will claim "victory" ?  good luck with that.
 
 
 
 
 
 

steven. The total amount invested in US tight oil production is about 100 billion. The US GDP is about 17 trillion. Fracking is less than one quarter of one percent of the economy.
The US economy  isn't booming. It is in a slow recovery phase. Fracking is no more imploding than any other commodity producing industry when prices fall. A period of rationalisation occurs, well capitalised players swallow up the minnows. Or are you now saying crude prices are going to be depressed for many years. Have you given up on peak oil causing shortages and rationing in "3-4 years, 6 years tops." Quote from you in 2010.