Fed Bullard’s “Violent Reconciliation” Shakes Market

Unless markets start to believe that U.S. interest rates are on their way up there could be a “potentially violent” reaction when they actually do, Federal Reserve policymaker James Bullard said on Tuesday.

Speaking to reporters at London’s City Week, Bullard said that expectations about the Fed’s interest rate plans should be better aligned than they are, but that the central bank would ensure the timing of its moves were well flagged.

“I think reconciliation between what markets think and what the committee thinks will have to happen at some point,” Bullard said.

“That’s a potentially violent reconciliation and I am concerned about that. I am hopeful that markets and the policy committee can come to some kind of meaningful meeting of the minds in the coming months and quarters over that should really look like.”

The Fed is inching towards its first interest rate hike in almost a decade, but analysts are still trying to guess its timing, having pushed back expectations last week after Fed chair Janet Yellen raised concerns about the dollar’s recent strength.

Bullard also said that the negative bond yields in core European government bond markets were “somewhat surprising” although it was helping suppress U.S. rates and therefore aiding the economy.

via Reuters

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza