As each day goes by the US economic data continues to err on the side of disappointment. Weaker than expected retail sales growth, a marked weakening of core inflation and now weaker than expected industrial confidence all adds up to an economic environment at odds with any rush to raise interest rates.
When the Fed last raised rates the economy appeared to be on a sounder footing. Economic history tells us that it is often the case that policy makers create economic cycles through poor decision making at crucial times. Could the Fed have made an error in raising rates. Only time will tell, but the flow of news since the rate rise at least challenges the conventional wisdom that the Fed made the right move.
Estimates by the Atlanta Fed suggests that the Fed raised rates in a particularly weak quarter. Their recent estimates of first quarter GDP growth was less than 0.5%. If the Atlanta Fed’s estimate is correct this would be the weakest quarter of growth that the Fed has raised rates in some 37 years.
Few commentators are challenging the Fed’s policy (aside from us) but the market is. With the US 10 year yield still anchored around 2.20% the bond market is highly sceptical that Fed policy is creating sustained levels of healthy nominal growth.
We should expect more noise from Fed officials in coming weeks that a further rate rise in June would not be prudent. We expect US government bond yields to remain at these levels or indeed go lower. Don’t rule out that by the end of the year the Fed admits it may have been wrong to accelerate its tightening of monetary policy. High quality bonds will in our view remain your friend in protecting your wealth from economic malaise and errant central bankers.