Carney’s Hawkish Turn Seen Setting Fashion for Yellen

Mark Carney was hailed as a fashion icon by the British media in his first months as governor of the Bank of England.

The cut of his dark-blue suits won praise as did his casual wear when he was photographed in shorts and a polo shirt at a music festival. Even a bag he picked up for free at an international conference was described as a killer accessory.

The Canadian is emerging as a trendsetter in monetary policy too. An increase in U.K. interest rates “could happen sooner than markets currently expect,” he announced last month.

That lurch toward the hawkish sent the pound climbing and prompted economists to revise their forecasts, with some expecting higher U.K. borrowing costs as soon as November.

The question investors are now asking is whether Federal Reserve Chair Janet Yellen will take the same journey. The debate burns brighter after U.S. unemployment fell to its lowest in more than five years. Goldman Sachs Group Inc. now sees a Fed increase in the third quarter of next year, rather than the first three months of 2016.

“Janet Yellen will be a close observer of whether Mark Carney can pull off his u-turn without causing too much volatility,” Commerzbank AG economists Bernd Weidensteiner and Peter Dixon wrote after last week’s U.S. jobs report.

There are certainly similarities. After bailing out their financial systems, the U.S. and U.K. central banks expanded their balance sheets to about a quarter of gross domestic product and embraced forward guidance. Their economies are now showing signs of growth.

Yellen’s Window

The differences may give Yellen more time. The U.K. has ceased quantitative easing, while the U.S. effort has months to run. The Fed targets employment as well as inflation, while Yellen has signaled a desire for wages to accelerate as a sign of labor-market health.

Still, unemployment is likely to fall below 6 percent and inflation is moving closer to the Fed’s 2 percent target. Federal Reserve Bank of St. Louis Fed President James Bullard is already saying he favors raising the benchmark rate from near zero in the first quarter of 2015.

Economists at Societe Generale SA and Royal Bank of Scotland Group Plc say Yellen will likely echo Carney before the end of the year.

That leaves markets at risk of complacency just as Carney reckons those in the U.K. were a month ago, said Weidensteiner and Dixon. If the Fed does opt for higher rates earlier in 2015 than it now anticipates it would want to signal that well in advance.

“The current extremely high valuations of government bonds would no longer be justified in such an environment,” said Commerzbank. “Markets might have to give up some of their more cosy views on monetary policy.”

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