Harbour commentary: Spiking the Punchbowl

• US Federal Reserve follows the ECB with more aggressive policy action. QE3 kicks off with purchases of mortgage-backed securities, in an attempt to lower mortgage rates.
• The FOMC “expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens…and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.”
• US long-term bond yields rose to the highest levels since May on the announcement, but subsequently fell as markets remained focussed on the more immediate prospect of subdued growth and ongoing Eurozone malaise.
• Alan Bollard delivered his final Monetary Policy Statement, leaving new Governor Graeme Wheeler with some flexibility, yet no apparent urgency to adjust the Official Cash Rate (OCR).
• In New Zealand, interest rates were barely changed, despite some modest intra-month volatility.
• Once again, the NZ and Australian corporate bond markets have remained surprisingly resilient throughout the volatility in global markets.  Retail demand for securities has led to strong performance from subordinate and perpetual securities.
• While long-term bonds appear expensive, and face medium-term risks, for now we anticipate yields to remain low as investors focus on the more immediate challenges faced in the global economy.

Central banks up the ante

In 1955, the then Governor of the US Federal Reserve launched the phrase that captured the essence of monetary policymaking in saying the Fed’s role was to “take away the punch bowl just when the party is getting good.” Nearly 60 years later Ben Bernanke has arguably done the opposite and spiked the punch bowl with a bottle of proof alcohol. The trouble is, right now hardly anyone is drinking.

At the US FOMC meeting on 13th September, the Fed announced a fresh package of quantitative easing (QE3) and monetary policy signalling. This included four elements:-
• Extending the guidance that the Fed Funds rate would stay near zero until 2015, from 2014;
• Going down the credit spectrum into mortgage-backed securities (MBS);
• Buying MBS in unlimited size;
• A signal that the aggressive monetary policy stance will continue until well into a recovery.