2003 May Be a Good Model for 2014: US Interest Rate Sensitivity to Macroeconomic Surprises

Goldman Sachs Macro Economics Research put out an interesting note last week showing that U.S. interest rates are less sensitive to macroeconomic surprises than in the recent past. In other words, despite relatively strong domestic growth this year (as a reminder: U.S. GDP came in at 3.5% annualized for Q3 2014 versus 3.0% expected), rates have fallen rather than risen. Why the disconnect, and do we expect it to reverse? Goldman’s Kris Dawsey, having compared 2014 to 2003 (10 months before the Federal Reserve began hiking rates in 2004) to see if we can expect U.S. interest rates to “re-sensitize” to macro data surprises any time soon, concludes that we can. In 2003, however, Dawsey estimates rates were upwards of four-times more sensitive than today, so the comparison is not exactly apples-to-apples. He provides several explanations as to why rates were more sensitive then than now, including increased transparency and forward guidance by the Fed. Additionally, he offers explanations from market participants who feel that rates in 2014 are constrained on the bottom by the Fed’s zero lower bound and on the top by an investor preference shift toward secular stagnation, which calls for reduced global growth expectations in the coming years. Dawsey shrugs these arguments off. “[T]he secular stagnation argument will likely lose traction as we remain in an environment of sustained above-trend growth,” he says, and adds that tightening labor market slack and the approaching rate hike will probably play a bigger role in rate movements going forward, similar to 2003. Whatever the case may be (and this is a hotly debated topic), we favor Goldman’s argument that growth and the resulting Fed action will probably play a bigger role in domestic interest rate movements going forward, especially as the first rate hike approaches.

Sources: Goldman Sachs, Bloomberg