On Twitter today, former BI colleague and current Bloomberg editor Joe Weisenthal asked:
Must rates eventually go up?
— Joseph Weisenthal (@TheStalwart) December 9, 2014
The answer, of course, is no.
Interest rates don’t have to do anything. But moving away from the sort of existential implications of what some financial market must do or not do at some indefinite point in the future, the reason Joe asked the question is because there is a broad assumption in the market that this is actually the case: there is an assumption that rates must go up.
I responded to Joe with no, and he came back with:
This is probably the future of economic forecasting: who knows?!
On Tuesday morning I attended a media briefing hosted by BlackRock. We go to these events for the bagels and the coffee and the chance to actually meet people whose research you read or with whom you exchange emails from time to time.
But so the firm walked through its official 2015 outlook, and in it they present this graphic, which is the “base case” for monetary policy from the world’s major economies in 2015.
But BlackRock Chief Investment Officer Russ Koesterich said something really interesting when he was walking through the various scenarios the firm sketches out in this graphic: “The odds we get it right seem remote.”
This is, of course, the only sensible thing to say. Predicting the course of monetary policy among seven separate central banks over the course of the next year is an impossible task. Most people (sorry: economists) would never attempt it.
Now, the firm has all kinds of reasons for wanting to provide their clients with a house view given that BlackRock’s job is to help clients make the best investment decision they can. And if giving clients a guesstimate on what happens next year is part of that process, then taking a shot is worth it.
But now that we’re some years on from the financial crisis and some of the trauma has started to dissipate, people are maybe getting towards a better understanding of just what went wrong. And one of the problems is that all of the predictive tools that economists and central bankers and policymakers had proved themselves worthless in the face of a global credit crunch. No one knew that the Z tranche of a synthetic CDO held off balance sheet at an investment bank would be such a problem.
And so as interest rates continue, broadly, to move in the opposite direction of what many anticipated this year, I’m brought back to Joe’s question about rates: must they eventually go up?
There is as good a case for no as there is for yes, which means there is no definitive case for either outcome. Interest rates will probably go up or down, but when and where and why are completely unknowable and will, no matter what, only make sense after the fact.
In adding to why BlackRock’s view likely won’t turn out exactly to be the case, Koesterich said that the number of divergences the firm is predicting for next year seem a little problematic.
Consensus is that the Federal Reserve is going to raise rates next year. But that doesn’t mean it will happen. Or it might happen to a lesser extent than the firm expects. Or tightening might happen sooner, faster, and so on. And this is only one of the seven banks. You can see how this gets complicated quickly.
In his webcast on Tuesday, Jeff Gundlach said he thinks the Fed will raise rates next year for philosophical reasons, not fundamental ones.
But this is just based on Gundlach’s interpretation of the Fed’s motivation.
It is entirely possible that the Fed begins to see the world as Gundlach sees it — from a fundamental standpoint that is — and sees a US 10-year Treasury at 2.2% and a German 10-year Bund at 0.8% and knows something is awry, something isn’t right, we have to stay put.
The thing is, anything can happen and the only thing we know is that something will happen. And so maybe Koesterich is on to something when he says we probably won’t be right. And like, yeah, Joe is just sort of throwing a question out to the crowd on Twitter, but it’s also a valid assumption to challenge.
Nothing has to happen, in life or otherwise, and financial markets are no different.
And so the future of forecasting might that there are no real forecasts anymore.
Which might be a good thing.
But which will probably come with a whole new set of problems; not that there will ever be a workaround for this.