Round 2: Quantitative Easing
Recent Federal Reserve communication has set the stage for additional quantitative easing in November. Not so long ago, “Fed speak” was centered on future steps that the Fed may take to gradually remove stimulus. However, this recent shift in communication has pivoted around a deceleration in growth and declining inflation expectations in the market. While the Fed’s chatter has been effective in preemptively “talking” long rates down, it also sends a clear signal to the markets that the Fed is intent on doing everything it can to counter any deflationary threats, including creating an inflation target (aka a price-level target). For institutional treasury professionals, this shift in communication should be a signal, especially after the passage of a huge variety of stabilizing financial regulations, to adjust credit and duration positions in cash portfolios. Reregulation, alongside a healthy corporate sector, argues for a continuing migration towards corporate debt for those that reduced their exposure during the credit crisis. Additionally, duration targets should be reviewed in light of a potentially longer low rate environment than was expected earlier in the year.
The new policy tools now being discussed by the Fed, along with the continuing tug of war between inflation and deflation, may have serious implications for the trajectory of short yields, and they warrant a review of the investment repercussions. Therefore, in this month’s Research Spotlight, we are investigating what this quantitative easing could mean to treasurers and their cash investment strategies.
Best Regards,
Ben Campbell
President & CEO
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