The absence of ‘tapering’ from the Fed at its September meeting is a reminder what ‘forward guidance’ (or ‘conditional commitment’) actually means: not very much. The FOMC’s attitude towards policy is for it to be data-dependent. Big deal. This is the same as every other central bank and the same approach the Fed has taken throughout the Great Recession.
Is there anything we can take away from the “taper tantrum” of the summer? Ultimately, there appears to be no rush to change policy – in any of the major economies. Growth (especially with regard to employment) remains ordinary while inflationary pressure is still absent.
It is changes in these facts, in either direction, which will ultimately determine the extent – and direction – of future policy changes. And it is here that we can find a couple of powerful messages:
- Although it is now generally accepted that the US has emerged with the strongest and most broadly-based recovery of the Western nations, the fact remains that growth is good, not great. We have previously commented on how much slower the current recovery than others over the last 50 years. It seems understandable that the Fed would perceive the risks of acting too soon as greater than those of acting too late.
- The second observation we can make concerns the nature of growth on each side of the Atlantic. In the UK and Euro Area, the facts are even less supportive of a significant shift in anyone’s position with regard to the growth and inflation environment, while government spending has had a far greater influence than in the US (see charts below)
This is in spite of the British government’s chest-thumping approach to fiscal austerity, and the protests seen after painful cuts in the European periphery. In the US, despite lower-key rhetoric, the government sector has materially reduced its share of GDP – being overtaken by growth in the private sector in every respect. An important message here is that economic growth is again showing itself to be the best remedy for fiscal woes.
So what does this mean for investors? Apart from reinforcing the lesson that looking at the long term facts is likely to tell you more than trying to second guess policy makers, today it appears that divergent trends in the economies on both sides of the Atlantic suggest it would be dangerous to assume that the shared path of policy rates (and short-term government bond yields) seen since 2008 is a sustainable one.