Skip to main content
MENU
Subscribe
  • Sign Up Free
  • LOGIN
  • Subscribe
  • Topics
    • Alternatives
    • Consultants
    • Coronavirus
    • Courts
    • Defined Contribution
    • ESG
    • ETFs
    • Face to Face
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Opinion
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Russia-Ukraine War
    • SECURE 2.0
    • Special Reports
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • Climate Change: The Inescapable Opportunity
    • Impact Investing
    • 2022 ESG Investing Conference
    • ESG Rated ETFs
  • Defined Contribution
    • Latest DC News
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2022 Defined Contribution East Conference
    • 2022 DC Investment Lineup Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Performance Data
    • P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
    • Future of Investments Research Series
    • Charts & Infographics
    • Polls
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
    • 2023 Defined Contribution East
    • 2023 ESG Investing
Breadcrumb
  1. Home
  2. ECONOMY
March 10, 2016 12:00 AM

Fed should embrace bond market, not fight it

Joseph H. Davis, Vanguard
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    Bloomberg

    While Janet Yellen, chairwoman of the board of governors of the Federal Reserve, testified before Congress on Feb. 10 and 11, the global stock and bond markets acted as a grim Greek chorus. As Ms. Yellen noted that the near-term risks of recession were low (a view consistent with our own), the U.S. stock market was putting the odds at more than 60%. The corporate bond market sounded a similarly baleful note.

    Inflation expectations are another sign of nervousness. Since 2008, market-based inflation expectations, derived from U.S. Treasury bonds, have hovered above 2%. In the past few weeks, these projections have tumbled below 1.5%. The Fed typically has paid less attention to market-based measures than to the more stable survey-based forecasts, but pessimism in the former can eventually begin to shape the latter.

    The markets’ distress and recessionary signals had little to do with China, oil or even the Fed’s 25-basis-point rate hike in December. These developments were either old news, already priced into the markets or generally positive for the economy.

    The source of distress was less obvious and more secular. It’s the divergence between the Fed’s plans for long-term monetary policy and growing awareness of a global economic future that, even in periods of expansion, will be frustratingly fragile, with frequent growth scares and deflationary pressures.

    As of December, Fed projections of future monetary policy — the so-called dots — indicated the federal funds fate would rise to 3.3% by 2018, even as Japan and some countries in Europe wrestle short-term rates into negative territory. This forecast is even more aggressive if one acknowledges the Atlanta Fed’s estimate that a hypothetically unbounded, or “shadow,” Fed funds rate might have been as low as -3% two years ago. (The shadow rate is an estimate of what the Fed funds rate would be if it were not bounded by zero.)

    Even if the pace of Fed normalization is gradual, the Fed’s 3.3% projection would imply a 630-basis-point rise in the Fed funds rate from the shadow rate, the most aggressive monetary tightening since the early 1980s. As global monetary policy diverges and the U.S. dollar strengthens, the Fed’s guidance could be too hawkish globally.

    In our view, the Fed’s optimal response would be not to fight the bond market, but rather embrace it, even if the bond market turns out to be too pessimistic. As the Fed prepares to release its latest rate projections at the conclusion of its March 16-17 Open Market Committee meeting, it might wish to stop publishing its long-term dots or at least lower them over the next two years. The Fed could also consider telegraphing an extended pause at 1% (yes, the Fed should and likely will raise rates several more times this year), acknowledging that growing policy divergence around the globe warrants a course correction at home. By lowering its final destination (rather than just underscoring a gradual rise), the Fed would show skittish global markets that it recognizes this frustratingly fragile global reality, and that it’s once again increasing the U.S. economy’s chances of ultimately escaping it.

    Market volatility is mostly noise, a dangerous distraction from the boring business of successful long-term investing. And that remains our counsel to clients.

    Amid the noise, however, we’ve detected a signal from the fragile economy that can provide insight to the Fed as it seeks to sustain the U.S. expansion in the months ahead.

    Joseph H. Davis is global chief economist and global head, investment strategy group, at Vanguard Group, Malvern, Pa.

    Related Articles
    Fed members not positioning to change course, minutes show
    Fed dots don't connect for bond traders scorning rate-hike path
    Fed cites economic progress but leaves rates unchanged
    Investment managers need access to better pricing in Treasury market
    Recommended for You
    ONLINE_180709904_AR_0_ZDKAZHDZSXUT.jpg
    U.S. added 517,000 jobs in January; unemployment rate lowest since 1969
    Mohamed El-Erian
    Top economist Mohamed El-Erian says U.S. 'not in recession,' expects 2 more rate hikes
    Bank_Of_England_Feb_2023_i.jpg
    U.K. economy remains on course to shrink despite rate hikes and improved inflation outlook
    The Institutional Investor's Guide to ESG Investing
    Sponsored Content: The Institutional Investor's Guide to ESG Investing

    Reader Poll

    January 25, 2023
    SEE MORE POLLS >
    Sponsored
    White Papers
    Show Me the Income: Discovering plan sponsor and participant preferences for cr…
    The Future of Infrastructure: Building a Better Tomorrow
    Outlook 2023: Opportunity in a volatile world
    Research for Institutional Money Management
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    December 12, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2023. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Consultants
      • Coronavirus
      • Courts
      • Defined Contribution
      • ESG
      • ETFs
      • Face to Face
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Opinion
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Russia-Ukraine War
      • SECURE 2.0
      • Special Reports
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • Climate Change: The Inescapable Opportunity
      • Impact Investing
      • 2022 ESG Investing Conference
      • ESG Rated ETFs
    • Defined Contribution
      • Latest DC News
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2022 Defined Contribution East Conference
      • 2022 DC Investment Lineup Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Performance Data
      • P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
      • Future of Investments Research Series
      • Charts & Infographics
      • Polls
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
      • 2023 Defined Contribution East
      • 2023 ESG Investing