First, Janet Yellen is taking an appropriately conservative stance on raising rates at present. Appropriate because she 1) sees what’s happening in Europe with the collapse of rates; 2) is wisely not trying to slow down QE and raise rates at the same time.
Second, information symmetry is at work. A lot of attention is given to information asymmetry – one party having an advantage over another. This often gets applied to sophisticated trading strategies or market information advantages. But today, almost anyone watching the global markets and geopolitics sees things happening at the same time, in near real time and reacts accordingly – thank you CNBC, Twitter and CNN. That is a different dynamic than has existed to this extent – and acting on the market and economic activity in unexpected ways.
What are the dynamics in place that are widely observed and reported on:
1) The US is just barely moving out of the recession and the fuel that has driven it is liberal monetary policy. If the flow is funds is slowed and rates rise – the economy is going to back slide.
2) The European markets are weak to anemic at best – and they are continuing to lower rates just sustain some minimal level of economic activity.
3) Global economic activity remains choppy and sluggish and a slowing of US economic activity by the raise rates/stop QE twins could drive a even broader global slump.
And you can pretty much observe this by keeping an eye on readily available, widely accessible information – information symmetry.
The Fed has another 6-12 months of assessing the realities of slowing down their spending. If that is digested by the economy without excessive heartburn (which it may not be) then maybe a 25 basis point raise is possible – maybe even 50 basis points. Then what? Economic activities slows – and investors still don’t have a compelling reason to shift to Treasuries or interest rate products.
So here is an observation – we are years away from a sustainable rising interest rate environment and investors seeking yield need to think about sticking with alternative strategies to get both yield and appreciation or it’s going to be a very long wait to invest.