2015 as 1994: more on Fed hikes this year

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Bill Gross and David Rosenberg are two smart investors who represent the dichotomy in markets right now. Rosenberg doesn’t see the Fed hiking rates until 2016, while Bill Gross points to June (link here). Which side of this debate you take could have a big impact on your portfolio.

My macro view is very much in line with what Tim Duy has written about the jobs report. He concludes this way:

Bottom Line:  “Patient” is out. Tough to justify with unemployment at the top of the Fed’s central estimates of NAIRU. Pressure to begin hiking rates will intensify as unemployment heads lower. The inflation bar will fall, and Fed officials will increasingly look for reasons to hike rates rather than reasons to delay. They may not want to admit it, but I suspect one of those reasons will be fear of financial instability in the absence of tighter policy. June is in play.

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What does that mean?

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  1. The path from quantitative easing to rate hikes is a. taper QE; b. end QE;  c. stop and re-assess d. end ”patience’ and move to a full-on tightening bias e. and then re-assess again
  2. When we get to the fifth step i.e. re-assess again, data dependence will reign and that necessarily means an end to forward guidance with long lead times, increased unpredictability and volatility
  3. By the time we get to the re-assess again part, which is where we will be after the March meeting, inflation will recede from view as a critical factor and so-called NAIRU (which I don’t ascribe to) and full employment will take center stage.
  4. Critically, since equity markets are fully priced, we could see poorer equity returns, something the Fed is secretly ok with I reckon.
  5. Lastly, 2015 could be a re-run of 1994 i.e. bond investors could get waylaid.

The last point is one that I believe is one to consider more going forward because of the Rosenberg – Gross dichotomy. While I am closer to Gross on timing, I am closer to Rosenberg on outcome. But what if Gross is right on timing and the impact as well? Then the 1994 experience comes to mind as Tim Duy charts here:

1994 fed funds and wages

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