There’s a major retreat under way.
One that’s just like you see in those old war movies, where the defeated army have to abandon their trenches and foxholes, leave their weapons, rations and anything else behind and run as fast as they can for safety.
Only this time, we’re not talking about soldiers. We’re talking about central bankers.
The first signs that these overaggressive manipulators and tinkerers were starting to worry came last spring. That’s when — after five years of ridiculously over-the-top crisis-era policy — Federal Reserve officials started hinting at a change in their approach.
They started whispering about a possible tapering of quantitative easing (QE), just weeks after promising to keep money easy until kingdom come. That action helped set off “phase one” of one of the largest bull markets in interest rates ever.
Then in late summer, the Brits got in on the retreat. The Ben Bernanke clone in charge of the Bank of England, Mark Carney, had to start furiously backtracking after strong growth and plunging unemployment in the U.K. made his long-term forecasts look silly.
|The Bank of England followed our Fed into retreat.|
He and his staff predicted it would take up to three years for unemployment to fall to his 7 percent target. Instead, they’re now saying that is probably happening right now. Not only that, but the BOE admitted that growth will likely be revised up to 0.9 percent from 0.7 percent in the fourth quarter, and that it should grow 3.4 percent this year, compared with a previous projection of 2.8 percent.
Back in Washington, the Fed did what I predicted they would do in late 2013 — launch the initial tapering of QE. We got a $10 billion taper in December, then another $10 billion in January.
And then, in testimony earlier this week, new Fed Chairman Janet Yellen picked up the white flag that Bernanke had already tentatively pulled out of his pocket and waved it vigorously from the ramparts of the Fed’s Ivory Tower! Her key comment:
“If incoming information broadly supports the Committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings.”
That’s Fed speak for “look for another $10 billion taper in mid-March, another $10 billion in late April, and more of the same until QE is finally wiped off the face of the earth for good!”
I’m constantly amazed that this is coming as a surprise to many of the so-called experts on Wall Street. Have they not studied more than 50 years of interest rate history like I have? Don’t they know that once economic and market conditions change, central bankers are always forced to do an about face on policy and run for the hills?
Look, in the past four “up” cycles for interest rates, the moves started in the bond market. Long-term interest rates started rising, then central bankers were forced to react with a lag. The average lag is about 10 months, with a variance around that mark of a few months depending on the cycle.
This time around, longer-term rates started surging in May 2013. So it should have come as no surprise that the Fed started tightening policy (by tapering QE, the de facto equivalent of “raising rates” since QE replaced rate cuts as the Fed’s primary policy tool once rates neared 0 percent) seven months later at the December meeting.
The other important lesson from history: Once central bankers change tacks on policy, they don’t do so in “one and done” fashion. They keep going and going and going just like the Energizer Bunny! We typically see a few hundred basis points of rate hikes spread out over the course of more than two years.
So mark my words: I don’t believe this cycle is over, not by a long shot. I believe it’s just beginning. And anyone who disagrees is fighting more than a half century of history.
Until next time,