Emma Wall: Hello and welcome to the new Morningstar series, Market Reaction. I am Emma Wall and will be asking the professionals and the public their views on the news. Today I have got Andrew Goldberg, Global Market Strategist for JPMorgan.
Hello Andrew.
Andrew Goldberg: Hello.
Wall: So Mark Carney has just delivered his latest inflation report. What's the new message?
Goldberg: The new message isn’t all that different from the old message. I would consider it more of a revised message. I think the revised message is that growth in fact was stronger than originally anticipated and by the way they are not alone in thinking that. Inflation was weaker. But I think the key thing for investors to focus on is that there is still scope to keep interest rates lower for longer despite the unemployment rate breaching that 7% threshold. In other words as he put it there is still sufficient slack in the economy.
Wall: So some headlines this morning were saying forward guidance is dead. Do you think that’s fair?
Goldberg: I don’t think it's fair, I think it’s fair to challenge the idea that forward guidance is as useful as it is. Your point from earlier we – forward guidance this time seem to only last six months. The idea behind forward guidance is to give investors some clarity and some certainty about the future. In this case; that interest rates will remain low for a long time. That way investors, businesses can plan for the future.
The problem is, in our view, tying forward guidance to a specific economic indicator in this case employment is risky. It can box you into a tough spot, because one variable can change rapidly, in this case the unemployment rate fell faster than a lot of people thought.
So our expectation is that they'll adjust forward guidance looking forward a little bit to account for that. I think it's unfair to say that forward guidance is dead, but you just got to be careful when you do it and I think that the Bank of England has learned tough lesson there.
Wall: There is an argument, forward guidance only having lasted six months, that there was no point in it. Do you think this is the case?
Goldberg: There is an argument, I think it's, I wouldn’t be – I'm less persuaded by the argument that there is no point in it, the point is very clear. I think the more important question is the quality or the approach towards forward guidance. I think the Bank of England would be probably, it would be in their interest to abandon the idea of trying to pin down forward guidance or future policy steps on a single economic indicator like the unemployment rate.
There are so many factors that can impact the unemployment rate, labour force participation, policy changes in the government. So what they should do, and I think what they could do is alter forward guidance to look more at inflation. Inflation is relatively benign that gives them scope in and of itself to keep rates lower for longer and it's unlikely that the inflation picture is going to change too soon.
Wall: So what can savers and investors expect then going forward?
Goldberg: It's a really important question. One of the key attributes that investors and savers have had to grapple with, not just in the U.K. but in the U.S. and around the developed world is that we've all been taught people should move down the risk spectrum into safer assets. Things like government bonds or even savings accounts as they age and move towards retirement.
What forward guidance tells us and central banks have been telling us that you are not going to get paid any interest on those savings or on those safe haven securities anymore. So the key thing to your point on this one for savers and investors is; don’t expect much to change in that respect. You are not going to be earning much from cash and contrary to what we've all been indoctrinated with our whole professional careers, you can’t just move down to risk free assets unfortunately in this period of time. You've got to do something to generate income for retirement, have a well-diversified portfolio. Interest rates won't rise anytime soon, not at least the Central Bank's end in the U.K. and for that savers will be punished in effect.
Wall: So in a way these perceived safe havens, are actually no longer safe.
Goldberg: It's funny, I recently heard someone refer to risk free assets, instead of the risk free rate they called it the rate free risk. Because by the way if you hold those assets and interest rates rise, you can also lose money on the value of those securities. So I think there is a lot of truth to that. If you think you are going to be able to retire comfortably, but it's okay to be safe and keep your money in cash, I think the Bank of England, the U.S. Federal Reserve are sending a strong message with forward guidance that maybe you should look elsewhere with your capital.
Wall: Andrew, thank you very much.
Goldberg: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
