While we may see further clarification from Federal Reserve Chair Janet Yellen or her colleagues in the coming days, her statement yesterday that there would likely be a six-month window between the end of the Fed’s Quantitative Easing program (QE) and the start of rate hikes was not all that surprising, according to Fran Rodilosso, fixed income portfolio manager for Market Vectors ETFs.
“That statement has had, and will likely continue to have, an impact on bond investors in the short-term,” said Rodilosso. “But the notion of mid-2015 rate hikes should not come as much of a surprise. It should also be taken, even if the statement is not clarified, as an estimate at best as nothing in this situation is pre-ordained. The Fed will obviously remain very data dependent.”
Rodilosso added that if the yield curve adjusts now, as it began to do in 2013 before the “tapering” process actually commenced, the market will have already done some of the Fed’s work. “The chances of a rate shock would be much reduced in that case,” he said.
“Ideally, we will see economic data to support a ‘tapping on the breaks’ by the Fed in middle of 2015,” continued Rodilosso. “Any actions sooner might indicate that the Fed has fallen behind the curve and the market is at risk for something much more severe than a normalization of rates. Anything later would mean that growth and employment are not yet firing on all cylinders. Equity and credit markets would likely struggle under the latter scenario.”
This article was written by Market Vectors Fixed Income Portfolio Manager Fran Rodilosso.