Wednesday, February 25, 2015

Embracing Uncertainty


On the heels of yesterdays blog (where I suggested that we not be paralyzed by uncertainty) comes BOC Governor Poloz's speech at the University of Western Ontario yesterday:

more here:

In his Conclusion, he states:

Our decision to lower the policy interest rate last month was intended to take out some insurance against both sets of risks. It gives us greater confidence that we can get back to full capacity and stable inflation by the end of 2016, instead of sometime in 2017, and it will cushion the decline in income and employment, as well as the rise in the debt-to-income ratio, that lower oil prices will bring.
Using the term “insurance” underscores that we are in a very uncertain setting, and what we are trying to do is to manage the risks we face, not eliminate them - we are not in a position to engineer the perfect outcome. The negative effects of lower oil prices hit the economy right away, and the various positives - more exports because of a stronger U.S. economy and a lower dollar, and more consumption spending as households spend less on fuel - will arrive only gradually, and are of uncertain size. Plus, the oil price shock itself is of uncertain size. So, the downside risk insurance from the interest rate cut buys us some time to see how the economy actually responds.
As you can tell, it’s an exciting time to be a central banker. Monetary policy-making is evolving in real time and, as I have argued, is deserving of true reinvention. We need to develop a monetary policy framework that integrates inflation risks and financial stability risks, both statically and dynamically, and captures much more accurately the uncertainties we face - in short, a true synthesis that takes full account of the lessons of the past, both new and old. Let’s get to it.
  •  Who would have ever thought that you might see the words "exciting" and "central banker" in the same sentence?
  • However, on a Global scale, central bankers have been steering economies with monetary policy trying to contain the aftershocks of The Great Recession.
  • They have been battling uncertainty and it is clearly having an impact on volatility:


The fight goes on....

Also yesterday (and continuing into today), US Federal Reserve Chairwoman, Janet Yellen was giving testimony before the Senate Banking Committee:
more here:

the Committee judges that a high degree of policy accommodation remains appropriate to foster further improvement in labor market conditions and to promote a return of inflation toward 2 percent over the medium term.

The FOMC's assessment that it can be patient in beginning to normalize policy means that the Committee considers it unlikely that economic conditions will warrant an increase in the target range for the federal funds rate for at least the next couple of FOMC meetings. If economic conditions continue to improve, as the Committee anticipates, the Committee will at some point begin considering an increase in the target range for the federal funds rate on a meeting-by-meeting basis. Before then, the Committee will change its forward guidance. However, it is important to emphasize that a modification of the forward guidance should not be read as indicating that the Committee will necessarily increase the target range in a couple of meetings. Instead the modification should be understood as reflecting the Committee's judgment that conditions have improved to the point where it will soon be the case that a change in the target range could be warranted at any meeting. Provided that labor market conditions continue to improve and further improvement is expected, the Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when, on the basis of incoming data, the Committee is reasonably confident that inflation will move back over the medium term toward our 2 percent objective.
It continues to be the FOMC's assessment that even after employment and inflation are near levels consistent with our dual mandate, economic conditions may, for some time, warrant keeping the federal funds rate below levels the Committee views as normal in the longer run. It is possible, for example, that it may be necessary for the federal funds rate to run temporarily below its normal longer-run level because the residual effects of the financial crisis may continue to weigh on economic activity. As such factors continue to dissipate, we would expect the federal funds rate to move toward its longer-run normal level. In response to unforeseen developments, the Committee will adjust the target range for the federal funds rate to best promote the achievement of maximum employment and 2 percent inflation.

Exciting Indeed!!

 The views expressed are those of the author, Scott Tomenson, a Raymond James Financial Advisor, and not necessarily those of Raymond James Ltd. It is provided as a general source of information only and should not be considered to be personal investment advice or a solicitation to buy or sell securities. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor's circumstances and risk tolerance before making any investment decision. The information contained in this blog was obtained from sources believed to be reliable, however, we cannot represent that it is accurate or complete. Raymond James Ltd. is a member of the Canadian Investor Protection Fund

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