October 20, 2017
“From now on, depressions will be scientifically created.” ― Congressman Charles A. Lindbergh, Sr. (father of aviator Charles A. Lindbergh, Jr.) upon passage of the Federal Reserve Act in 1913.
Brian Nick, Chief Investment Strategist, TIAA Investments
But if Taylor, one of the more hawkish candidates, is selected, we’d expect a shaky initial response from both the stock and bond markets on the risk that he might diverge meaningfully from Yellen’s approach. That’s because changing the course of current monetary policy is tricky business. First, he’d need to forge a new consensus among the voting members. Second, he’d have to reckon with the fact that the market has internalized the relatively dovish forward guidance on rate policy and could react adversely to changes to that policy. Lastly, he’d have to consider policies currently being undertaken by other central banks.
Should the European Central Bank, for example, slow-play its exit from quantitative easing, the Fed will encounter difficulty accelerating its hiking cycle without sending the U.S. dollar back to uncomfortably high levels. Given these obstacles, markets that otherwise might have been wary of Taylor’s candidacy barely budged following reports early in the week that his interview with Trump went well.
In U.S. fixed-income markets, the yield on the 10-year Treasury note rose nine basis points (0.09%), ending the week at 2.39%. (Yield and price move in opposite directions.) Much of the increase was attributed to news on October 20 that the Senate had adopted a budget for the next fiscal year, a key step before tackling tax reform.
Most non-Treasury fixed-income sectors also posted negative returns for the week through October 19. High-yield bonds bucked that negative trend with a modest gain.
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