Opinion

James Saft

The trouble with forward guidance: James Saft

Dec 24, 2013 05:02 UTC

By James and Saft

(Reuters) – Keeping your word is hard, and people simply hate it when you don’t, something that central bankers enamored of the vogue for “forward guidance” may soon learn.

The Federal Reserve put forward guidance – essentially a pledge or promise to keep policy within certain parameters for a set period of time or given certain conditions being met – at the center of its strategy for keeping control over market interest rates while withdrawing from bond buying. In announcing a $10 billion per month taper, or reduction in bond buying last week, the Fed sweetened the medicine by hardening forward guidance to indicate that rates could remain near zero “well beyond” the time unemployment drops below 6.5 percent so long as inflation remains below a 2 percent target.

In some ways this has worked admirably – markets for risky investments remain upbeat. But in other areas, namely the exchanges where people make bets about future interest rate moves, things seem to be getting away from the Fed.

Back to that in a minute, but first let’s look at why central banks are now so taken with the idea of expectation setting as a monetary policy tool. In part it is because forward guidance is a tool that potentially turns the screws even when rates are near zero, and does so without actually buying anything.

In part though, this is simply the latest in a series of vogues for one technique or another. In the 1980s central banks tried to control the money supply, while more recently it was all about inflation targeting. Whether this was the march of science or the march of folly we will leave history to decide, but change has been a constant.

The “smart beta” oxymoron

Dec 19, 2013 20:34 UTC

Dec 19 (Reuters) – As is so often true in investments, in
the case of “smart beta” it turns out that if it sounds like an
oxymoron, it probably is.

Beta – the opposite of alpha, otherwise known as beating the
market through skill – is the return you get from market
exposure. In other words, if you buy an index fund you get beta.
Pay up for an active fund and you are betting on receiving alpha
in return.

Smart beta is a strategy which tries to improve on index
tracking returns by adjusting away from the typical cap-weighted
style, in which a given fund will hold shares or securities in
proportion to market capitalization.

A taper is whatever the market says it is: James Saft

Dec 18, 2013 22:44 UTC

By James Saft

(Reuters) – Coming months will answer decisively a question the Federal Reserve insists is already settled: is a tapering a tightening?

Score one for the Fed today: it cut purchases of bonds to a monthly $75 billion from $85 billion, but paired the move with a confection of sweeteners which touched off a startling rally in equities and only a small increase in long-term interest rates.

“Tapering is not meant to be a tightening,” Bernanke said after the Federal Open Market Committee announced the move. “The Federal Reserve means to keep the level of stimulus more or less the same.”

Fed may wait, you shouldn’t

Dec 17, 2013 13:04 UTC

(James Saft is a Reuters columnist. The opinions are his own.)

By James Saft

(Reuters) – The Federal Reserve probably won’t taper when it meets this week, though maybe it should.

Financial markets definitely ought to sell off no matter what the Fed does, but almost certainly they won’t.

The Federal Reserve will announce its interest rate policy on Wednesday, after which Ben Bernanke will get a chance to explain why, or why not, they choose to reduce bond purchases. While less than a fifth of economists polled by Reuters expect the Fed to taper in December, a recent run of encouraging data has driven that figure up four-fold in just one month.

Fed may wait, you shouldn’t: James Saft

Dec 17, 2013 05:01 UTC

Dec 17 (Reuters) – The Federal Reserve probably won’t taper
when it meets this week, though maybe it should.

Financial markets definitely ought to sell off no matter
what the Fed does, but almost certainly they won’t.

The Federal Reserve will announce its interest rate policy
on Wednesday, after which Ben Bernanke will get a chance to
explain why, or why not, they choose to reduce bond purchases.
While less than a fifth of economists polled by Reuters expect
the Fed to taper in December, a recent run of encouraging data
has driven that figure up four-fold in just one month.

Hot U.S. housing markets turning cold -James Saft

Dec 12, 2013 20:03 UTC

Dec 12 (Reuters) – After rapid gains, some of the hottest
housing markets in the United States look like they are starting
to roll over.

Whether this is a reaction to the run-up in mortgage
interest rates in recent months or represents a waning bid from
the all-cash financial investors who have so often been marginal
buyers is unclear. Either way, volatility in house prices may
now prove to be a feature of the system rather than a bug.

In Phoenix, where house prices have risen more than 40
percent in less than two years, pending sales fell 32 percent in
October, while the number of months (at current sales rates) of
supply is up 111 percent from May.

A taper won’t come cheaply

Dec 11, 2013 21:02 UTC

Dec 11 (Reuters) – Better economic data has pushed a
tapering of bond buying by the Federal Reserve higher up the
agenda – even as early as next week. A taper may come, but it
won’t come cheaply.

Risky assets (that means you, equities) will be in the
firing line.

Last week’s jobs data were encouraging, as are surveys of
manufacturers, making sagging inflation the chief argument for
delay.

“The Federal Reserve wants to taper. Wants very badly to
taper, in my opinion,” writes Fed watcher and University of
Oregon economist Tim Duy. (here)

Un-funny jokes about credit

Dec 10, 2013 13:06 UTC

(James Saft is a Reuters columnist. The opinions expressed are his own)

By James Saft

(Reuters) – What happens when credit conditions are far too loose, the banking system is fragile and interest rates start to rise?

Yes, I know you have heard this joke before, and yes, I know it is not funny.

The Bank for International Settlement’s quarterly review of financial conditions is an exercise in nightmarish déjà vu: familiar to those who watched the last crisis but just different enough to be plausible. (here)

Not only are credit markets so loose that comparison with pre-Lehman Brothers days are fair, but this is happening within a context in which investors, on the whole, don’t really have faith in the strength of banks.

Un-funny jokes about credit: James Saft

Dec 10, 2013 05:01 UTC

Dec 10 (Reuters) – What happens when credit conditions are
far too loose, the banking system is fragile and interest rates
start to rise?

Yes, I know you have heard this joke before, and yes, I know
it is not funny.

The Bank for International Settlement’s quarterly review of
financial conditions is an exercise in nightmarish deja vu:
familiar to those who watched the last crisis but just different
enough to be plausible. ()

Not only are credit markets so loose that comparison with
pre-Lehman Brothers days are fair, but this is happening within
a context in which investors, on the whole, don’t really have
faith in the strength of banks.

Much at stake for EM on jobs Friday: James Saft

Dec 5, 2013 20:58 UTC

(James Saft is a Reuters columnist. The opinions expressed are his own)

By James Saft

(Reuters) – Emerging markets will have a great deal at stake when Friday’s U.S. jobs figures are announced.

If the data is good and a Federal Reserve taper seems more likely, emerging markets will fall, hard, while if hiring was disappointing we can count on an outsized rally.

In part, this is for no more complicated a reason than emerging markets are at the riskier end of the investment spectrum. Bond buying works by exchanging cash for ‘safe’ assets and forcing a new investment decision with lower returns for safety. That is intended to prompt risk-taking and the riskier an investment the more, proportionally, it benefits.

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