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Home > Blogs > Moorad Choudhry > You read it here first: an Uber-Dove at the helm means markets are only going up

You read it here first: an Uber-Dove at the helm means markets are only going up

You read it here first: an Uber-Dove at the helm means markets are only going up Moorad Choudhry

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Forecasting is a mug’s game at the best of times, so one’s success in this field should be treated in the same way as one’s failures: with a wry smile. And this week’s headline in The Times – [US Fed] Rates pledge pushes the S&P to a record high – raised just such a smile! If readers will indulge me, I’ll refer them back to my QFinance blog post of 18 March 2014 where I stated:

"FOMC and optimism: an uber-dove at the helm means markets are only going up in 2014"

And so it has proved! Equity markets are being sustained on central bank action, and with Janet Yellen on one side of the Atlantic and Messrs Carney and Draghi on the other side making clear that they will only contemplate even a miniscule tightening of very loose monetary policy when they are firmly convinced that we are back to a strong and stable economic outlook, equity investors continue to act as if they have nothing to lose.

And why shouldn’t they? If markets go up, they win. If they go down, central banks repeat yet again how they won’t do anything unless they are convinced the “recovery” is here to stay, and on such utterances markets resume their upward trajectory. So again investors win. It’s a no-brainer.

This week, the markets were reacting to comments at the Jackson Hole meeting of central bankers, where Ms Yellen said that interest rates would remain low until there were more signs of improvement in the labor market.

Er… just how many more signs? Unemployment is lower in the US (and in the UK and Northern EU, for that matter) now than it was in 2009 or 2012. Shall we wait until we have full employment? The “new normal” isn’t lower rates of GDP growth, it’s the public sector underwriting the private sector – a dangerous and insidious new role for central banks that has not been debated sufficiently in depth and has no formal mandate.

And of course the central banks don’t mean “low” interest rates, they mean “zero” interest rates. Even assuming that the top of the next rates cycle reaches 3.5%, which is at the higher end of most analysts’ predictions, that would still be a pretty low interest rate by historical standards.

We have nothing to fear except fear itself: never a more accurate saying than it is today about Western central banks. They are obsessed with not moving an inch away from easy monetary policy until they are 100% sure the economy is back to strong and stable growth. And I bet a tray of cream cakes that when they have decided that that point has arrived, we’ll be only a quarter or two away from the next bust.

Governments must really love these new “independent” central banks.

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