The Fed being in dispute about holding fire on the elusive second rate rise since the 2008 crisis presents many questions, one of which is: does the Fed actually have a good grasp of what is happening in the US and global economy?
A ‘glass half empty’ way to look at the split is to take the view that the Fed collectivly does not have a clear understanding of the situation at the moment, which is concerning.
If the ten economic experts present at the meeting whose key responsibility is to understand the economy, how it will evolve over the coming months, and implement policy accordingly cannot form a consensus, then how can anybody else be sure of the situation?
A positive way of looking at the split is to see it as reassurance that the members are acting independently and engaging in serious debate during the meetings to test theories and arguments, rather than all thinking the same way and quickly coalescing into a unanimous agreement every time.
Another issue that the meeting minutes hint at is an underestimation in markets of the Fed’s propensity to change paths in reaction to data. This could be contributing to a bubble in asset prices, which will burst when the Fed’s hand is forced into a raise by data such as an inflation rise, for example.
‘Credit rally to continue’
Despite this murky picture, Michael Buchanan, deputy CIO at Legg Mason’s Western Asset, argues there is significant opportunity in credit markets to profit from the Fed’s continued dovishness.
“The rally in US corporate bonds so far in 2016 has been nothing short of remarkable and shows no signs of slowing in the near term, with interest rate rises shelved for the foreseeable future, he said.
“After a challenging start to the year, which saw US credit markets price in a non-existent recession, there has been a credit rally since mid-February which – despite a few challenges – currently shows no signs of slowing.”