Nimble management required in light of Fed QE tapering, says Lombard Odier IM’s Salman Ahmed
Salman Ahmed, global and emerging fixed income strategist at Lombard Odier Investment Managers, believes bond fund managers must be able to act flexibly in light of the latest Fed rates news.
Yesterday’s Federal Open Markets Committee (FOMC) statement and the press conference by chairman Bernanke more or less confirmed September as the most likely start date of the rollback of the US’s quantitative easing program, given current economic conditions. The Federal Reserve chairman also gave more details around the various exit principles being discussed by the FOMC.
Beyond the more hawkish-than-expected headline stance, the chairman introduced subtle changes in the way the Fed views various economic variables. We think this is an attempt to generate policy flexibility to deal with various potential economic scenarios down the line.
For example, an unemployment rate of 6.5% is no longer an automatic trigger to keep rates at exceptionally low levels but a minimum threshold for a Fed funds rate hike. Moreover, the importance of inflation as a swing variable for future policy developments was re-introduced. We think this will allow the US central bank additional flexibility, even if the ongoing labor market improvement continues to run ahead of expectations in coming months. Overall, we believe exit from easy monetary policy has begun. However, the eventual exit path is uncertain as it will depend on how the US economy evolves from here.
With this uncertainty, we think bond managers now need to be nimble and equipped with the full range of tools to manage duration, credit and inflation risks. We think investors without this flexibility are dangerously exposed.