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Despite that fact that US GDP has been remarkably stable since the end of the Great Recession, market expectations about growth have been far more volatile. We have argued in past Insights that one of the reasons for this is that whenever growth hovers below 2%, any poor data reignites recession fears. A data-dependent Fed reinforces this dynamic. With the Fed’s current tightening threshold for unemployment at 6.5%, investors have done the math: 100,000 monthly job gains keeps the Fed on a zero rate path combined with continued QE, but 180,000 does not.
Hence, it should be no surprise that uncertainty regarding the Fed’s prospective policy path has risen in response to upward revisions to recent payroll numbers and other signs of stronger economic data elsewhere.
Extrapolating the underlying trend in growth will remain challenging due to the impact of the federal sequesters and possible seasonal weakness similar to the pattern observed over the past three years.
This underscores why telegraphing the short-term path of Treasury yields remains challenging. However, our view remains that growth will return to an above-trend pace later this year: Treasury yields should be sustainably and significantly higher on a 12-month investment horizon.
This post was originally published by the BCA Research blog.