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Federal Reserve Chair Janet Yellen says she wants investors to be prepared for the possibility that the Fed will raise interest rates sooner than they currently project. Her words are going unheeded.
Volatility across stocks, bonds and currencies worldwide is close to record or multi-year lows, even after Yellen cautioned last week that the Fed’s commitment to keep interest rates near zero for a “considerable time” could change if U.S. economic performance continues to exceed expectations.
This absence of wide swings in trading values reflects investor complacency about the central bank’s intentions -- and may be too much of a good thing for its policy makers as they consider retreating from years of low-rate pledges that suppressed borrowing costs and fueled a recovery from the worst recession since the Great Depression.
The danger: unexpected economic strength may speed up the timetable for tighter Fed policy, prompting a sudden surge in volatility that could jeopardize the expansion.
“The risk is that the Fed ultimately does tighten policy in the way that it’s expecting and is communicating, and markets have to adjust up very quickly in a disorderly way,” said Laura Rosner, a U.S. economist at BNP Paribas SA in New York and a former New York Fed researcher.
Bank of America’s MOVE Index of Treasury swings fell to 57.43 yesterday, close to its lowest level in data since 1988. The Chicago Board Options Exchange Volatility Index, which measures swings in stocks, was at 14.93 (VIX), compared with a 20-year average of 20.75. The JPMorgan Global FX Volatility Index was at 7.38 percent, still near a record low of 5.29 percent in July and down from a 20-year average of 10.46 percent."
