Depressed for years after the financial crisis of 2008 by zero-rate and quantitative easing policies of major central banks, volatility is returning due to a combination of factors, according to a report by CME Group chief economist Bill Putnam.

Solid growth in U.S. employment and a sense that deflationary pressures, driven in part by lower oil prices, are abating have raised questions about the timing of the Federal Reserve to abandon its zero-rate policy and raise its target range for the federal funds rate in 2015.

“Our sense is that there seems to be a growing consensus among the hawks and doves within the Fed’s policy-making Federal Open Market Committee (FOMC) that eliminating negative real rates – that is, keeping the federal funds rate below the core rate of inflation — is no longer appropriate after five years of solid, if not exciting, economic growth,” Putnam said.

The timing of any rate move remains in doubt. First quarter real GDP may surprise on the weak side, and international factors including a strong dollar and a decelerating China, argue for a delay.

“The ebb and flow of the Fed’s rate debate is going to keep the short end of the U.S. maturity curve dancing, because the Fed has made it abundantly clear that its decisions are data dependent, and the data is simply getting noisier,” said Putnam.

In anticipation of a possible rate-rise decision by the Fed, one scenario would have U.S. Treasury yields moving higher in anticipation, but this is not so clear, according to Putnam.

There are powerful global constraints on higher U.S. Treasury yields, he said. Massive asset purchases by the Bank of Japan and more quantitative easing from the European Central Bank and its Eurozone national central banks set for 2015 have driven 10-year Japanese and German bond yields below 0.40%.

The Fed debate may be driving the short end of the maturity curve, but BoJ and ECB QE are making it more likely that the yield curve flattens rather than experience a parallel upward shift. On the domestic front, the Fed ended its QE in October 2014, and growth in the supply of new Treasury securities is shrinking as the U.S. federal budget deficit fades away.

“Taken together, it is a prescription for substantial volatility within a wide range,” Putnam said.

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