"Because the market has somewhat challenged this by pushing up market interest rates, the Fed’s response has been to say ‘you don’t believe what we have said so far, so let’s make it even harder for you to price in rate hikes by reneging on the suggestion that we would start to end QE, and by making it very clear that we don’t think that the economy is strong enough to reach the economic thresholds previously set out for a very long time. So get used to it, rates are staying low’.
A more cynical interpretation would be that the real motivation for monetary policy is the wealth effect and ensuring that house prices and the stock market keep rising to boost household balance sheets even more. After all, private sector debt is still high. Low market rates should keep mortgage rates from rising further and stock prices should keep on their strong upward path. Moreover, the corporate sector has even more time to lock in very cheap money that it can borrow from the capital markets. Stronger balance sheets make the recovery more durable in the long run, but at the risk of asset price inflation. The legislative goal of the Federal Reserve may well still be low inflationary full employment growth, but an intermediate target appears to be household wealth. The Greenspan/Bernanke/Yellen/whoever “put” is still in place.
The benchmarks for challenging the Fed have been increased. Now investors have to see lower unemployment, strong output growth, a healthy housing market to even think about challenging the rates outlook. What does it take to get higher rates in the US now? When we know the answer to that question it might be too late. Higher inflation or another boom and bust. Vive la différence!”
Chris Igggo, CIO Fixed Income at AXA Investment Managers
