There has been a difference of opinion between the US Federal Reserve (Fed) and the bond markets for some time about when US interest rates will start rising.
The undeniably good macroeconomic news appeared to support the Fed’s repeated warnings that rates would go up sooner rather than later.
But markets did not bite, as shown by record low bond yields reached in the first quarter, which remain low today despite the Fed recently taking a less dovish stance in its official outlook statement.
The problem seems to be that although unemployment is falling, the quality of the jobs being created and the wages being paid are not good enough.
There is the additional knotty problem of a fall in inflation. It is hard to imagine any central bank hiking interest rates when inflation is close to zero, even if it that was caused by a fall in the price of oil which, by some estimates, puts about US$100 a month into the pocket of the average consumer.
The economy should be powering away by now. Unfortunately, that is not happening.
Whilst the US economy is still doing well in absolute terms, the momentum is slowing. This recovery is not accelerating and the problem this poses is: what exactly is the US consumer going to do next?
Suppose they start saving. That is hard to imagine with interest rates so low but what if, after half a dozen years of rising debts, the household consumer decides to ease up on spending and pay off debt instead?
I believe this is what Janet Yellen, chair of the Fed, is concerned about. The economy may have recovered but many feel it has not.
Even investors in equities do not seem particularly excited by markets hitting new historic highs.
Perhaps they are wary that near-zero interest rates are what has made new highs possible and it cannot last – which, according to Janet Yellen, it cannot.
The Fed rate: how much longer on the floor?
Source: US Federal Reserve
Deciphering Fed speak
Trying to decipher every nuanced change to Fed speak is a dark art. It is now saying that while it has removed the need to be patient in waiting for the right signal to trigger higher rates, this does not mean it will be impatient.
This may imply that in the months ahead the Fed is going to be data dependent just like us mere mortals.
If so, this may serve to close the gap on the difference in expectations, but this gives the impression it sweeps away some of the mystery about what goes on in the depths of Fed thinking.
Once the Fed starts raising rates, there will be no going back. Even if it decides to make just one hike and that is enough, it will not be for turning if the economy turns a bit rocky.
Any number of external shocks could affect the economy, ranging from geopolitical upheaval across the Middle East and Ukraine to oil price volatility, the eurozone and even the weather.
On balance, I think the next hike in interest rates by the Fed will be in September rather than June, and that there is a chance it will not raise rates at all because the economic data could stall, kicking the stool out from beneath the justification for doing it.
New sub-zero normal
In the short term, while the sharpness of recent corrections in the US dollar has been slightly disconcerting, this was because its rally was a bit ahead of itself, confirming that the consensus view on what to own and what to avoid in 2015 was just a little too strong.
In a world short of alternatives and some investors chasing yield at any price, even negative yields, this was perhaps inevitable.
Ireland recently issued three-month debt at negative yields. This is an extraordinary change in circumstances from a few years ago.
But the age of zero interest rates is here and we must learn to invest in the new normal.
Christian Holland is head of UK investment management at TAM Asset Management.