Quantitative vs Qualitative

12 June 2016, 08:12
Sherif Hasan

Since the global financial crisis the Bank of England and the Federal Reserve have used the policy of quantitative easing to try to revive consumer spending and economic growth.

Usually central banks try to raise the amount of lending and activity in the economy indirectly by cutting interest rates, as lower interest rates encourage people to spend instead of save. However when interest rates can go no lower a central bank’s only option is to pump money in to the economy directly which is known as quantitative easing.

Since then Federal Reserve have adopted a more quantitative guidance, meaning that the Fed are looking at the unemployment rate and inflation for a gauge on how well the economy is recovering and when interest rates should rise.  However On March 19 the FOMC scrapped the unemployment threshold, saying in a statement after a two-day meeting that it will look at a wider range of data when considering when to increase interest rates.

This means the Federal Reserve will be adopting a more qualitative approach for signalling when it will raise the benchmark interest rate.  Meaning they have moved away from just looking at unemployment and inflation for a gauge on when to raise rates.

With this is mind, the market has moved from focusing on unemployment and inflation data and instead are looking at all the data as whole.

A recent example of this is from May 2, when US Non-Farm Employment came in at 288k verses an expected 216k and the unemployment rate dropped to 6.3% from an expected 6.6% which seemed very US Dollar positive at first- however at the same time Average Hourly Earnings came in worse than expected at 0.0%, meaning that jobs were created but they were low paid and generally not very good jobs. Because of this the US Dollar quickly reversed all its gains to trade negative on the day.

This is one small example of how we know the market is paying attention to the same things the Federal Reserve are and not just focusing on the headline figures anymore. Be sure to keep an eye on all of the data from the US as that is what the Federal Reserve are now focused on for the timing of raising rates.


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