Fed's policy normalisation is now in critical phase - Nomura
|Richard Koo, Chief Economist at Nomura Research Institute, explained that the rise in US long-term interest rates over the past few weeks has fueled global stock volatility and came as a shock to the financial markets.
Key Quotes:
"The Fed’s decision to carry out its eighth rate hike in the current tightening cycle on 26 September added to the upward pressure on interest rates. A key topic of discussion among market participants is how much further the Fed will raise rates. This depends in part on what the neutral rate of interest is, and it appears that FOMC members have yet to reach a consensus on this question."
"Policy normalization has finally entered critical phase as the Fed is now absorbing $50bn in excess reserves every month."
"Reserves in the market would almost return to normal if it were to keep this up for two years. In that sense, the policy normalization process has entered its critical phase."
"The Fed’s greatest concern at the moment is probably whether the $50bn/month absorption of excess reserves that began this month will go smoothly. The near-20bp increase in the 10-year Treasury yield at the beginning of this month may have come as a bit of a shock in that sense."
"All in all, I suspect that recent mentions of the neutral rate of interest—which as we have seen is a largely meaningless concept when there are no borrowers—were intended merely to distract market participants."
"I think the Fed wants to focus attention on interest rates until the $50bn-per-month absorption of excess reserves becomes established."
"Further volatility in long-term interest rates would probably prompt the Fed to delay additional rate hikes, while stable long-term rates would lead it to continue hiking, in part because that would help keep the market’s attention centered on interest rates."
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.