May's market tremors could reflect fear of 'groupthink'

Wed May 27, 2015 1:52am EDT
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By Mike Dolan

LONDON (Reuters) - For anyone expecting interest rates to be stuck near zero for years to come, the past month has been uncomfortable.

The so-called "new normal" or "secular stagnation" theses that posit years of paltry world growth, lingering economic slack and downward pressure on prices and interest rates have fast become consensus thinking among top investors, financial and academic economists.

So much so that policymakers and markets have shifted dramatically to discount them, pushing official and long-term interest rates to zero and below - spooked late last year by the deflationary threat associated with a halving of oil prices.

And while consensus thinking has become consensus policymaking, the financial herd has followed suit.

But some fear that 'groupthink' may have taken hold on a problem that's not all black and white.

This month's jolt higher in long-term borrowing rates around the world reflects some of those doubts, as much as angst about overstretch in the bond market combined with ebbing fears of chronic deflation, rebounding commodities and the euro zone's return to growth in the first quarter.

Investors watching a jarring, weather-related U.S. economic stutter over that same period were especially blindsided given many had started to push the Federal Reserve's long-awaited first rate rise in nine years onto the back burner and even into 2016.

They received another reality check last week as U.S. April inflation surprised, Fed chair Janet Yellen stuck to her guns on a 2015 hike and her Vice Chair Stanley Fischer emphasized a Fed rates horizon as high as 3.25-4 percent through 2018.   Continued...

Federal Reserve Chair Janet Yellen speaks at a meeting of the Financial Stability Oversight Council (FSOC) at the Treasury Department in Washington May 19, 2015. REUTERS/Carlos Barria