While the Fed has announced that it will taper asset purchases by $10 billion starting in January, its intervention into the market is still a long way from over, according to Brevan Howard investment fund.
“Monetary policy promises to remain very accommodative even as the mix of tools is recalibrated in the next few months,” says the most recent Brevan Howard shareholder report. “The Federal Reserve will taper its asset purchases from January 2014 by $10 billion to $75 billion and rely more on forward guidance, with the Fed likely to keep overnight interest rates near zero ‘well past the time’ the 6.5% unemployment threshold is reached. The market might suffer from some volatility as the new framework is put into place, but the ultimate outcome will still be that the Fed is going to be providing a lot of support to the economy for a long time.”
Fed’s Bernanke spares Yellen’s dovish credentials
Even without debating the nation’s real economic strength, there had been some disagreement about whether Fed chairman Ben Bernanke should have started tapering before leaving office or leave it to Janet Yellen, who will succeed him at the end of January, as her first major policy decision. Some see this as giving Yellen cover to taper without losing her dovish credentials, while others think it deprives her of an important show of leadership and independence.
If it was Bernanke’s intention was to give her some cover, it appears to have persuaded analysts at Brevan Howard, since the fund is now working on the assumption that monetary policy is still being used for the same ends, and that only the method is being changed.
Even though Brevan Howard, which has $39.8 billion in total assets under management, gets most of its returns from equities, it also makes a significant amount of money from forex trading and euro interest rate trading, growing the NAV per share value by 1.33% net fee last month, so changes to monetary policy will directly impact the fund’s business. It’s also heavily invested in financials (about 60% of the fund’s stock portfolio, followed by energy and industrials each with nearly 15%), giving it even more incentive to watch central banks closely.
Signs of long-term accommodation abroad
Looking abroad, Brevan Howard also sees signs of long-term accommodation in the language of the Bank of England and the Bank of Japan.
“The BoE is not minded at all to bring forward the point at which it intends to increase interest rates,” the fund wrote in its newsletter. “Instead, communication has started to focus on the conditions under which rates could be kept on hold for a further period after the [7% unemployment] threshold has been reached, as long as medium-term inflation pressure remains weak.”
While the fund thinks Japan should be more concerned about an upcoming consumption tax hike than its current interest rate, it’s telling that even as the equity prices rise and people point to signs of recovery worldwide, central bankers aren’t showing much enthusiasm for tightening policy.
Below: Full letter to shareholders in scribd and PDF