Quick takes on US Federal Reserve rate hike

THE US Federal Reserve hiked rates by 25 basis points on Wednesday for the second time in three months, a move widely anticipated by the market. The Fed also guided for two more hikes in 2017.

Here are some expert views.

More data needed for further hikes

Lee Ferridge, head of multi-asset strategy for North America, State Street Global Markets:

“Attention will now most likely shift to the June 14 meeting when many expect a further increase in rates. However, with the much talked about Trump fiscal stimulus still some way away from fruition, the Federal Reserve (Fed) will wish to see continued economic strength and, perhaps, signs of a pick-up in wages before committing to a June move.

SEE ALSO: US Fed due to meet with a rate hike on the cards

“We expect little market reaction to today’s decision given it was widely priced into markets. It will take further positive economic news to continue the push higher in US bond yields and US dollar.”

Antoine Lesné, EMEA head of ETF strategy, SPDR ETFs:

“The FOMC (Federal Open Market Committee) acknowledged further improvement in labour markets, business investment trends and consumer spending as well as sentiment generally rising. Meanwhile core inflation is getting closer to the Fed’s goal. Nevertheless uncertainty surrounding fiscal policy still poses some near term risks.

“More data will need to be gathered to envisage a more hawkish path keeping potential further rate increases to two in 2017. This could lead to bear steepening in the front end of the curve (two to five year) with two-year bond yields rising a bit less than five-year.”

Fed hikes early to give itself option for faster hike path

Richard Jerram, chief economist, Bank of Singapore:

“We continue to expect seven rate hikes by the end of 2018 (three this year, four in 2018) and there is a decent chance that the Fed ends up moving each quarter until rates are back to normal at 3 per cent. By hiking in March the Fed has left the door open to a faster pace of tightening this year if the data remains strong.

“The fiscal policy stance of the Trump administration is still unclear, and there is clearly a chance that an increase in the budget deficit to fund tax cuts leads to the Fed tightening policy faster than currently planned. However, it looks like this is more likely to be an issue for 2018 rather than 2017.”

Environment supports taking risk, US dollar strength

Anthony Doyle, investment director of Retail Fixed Income, M&G Investments:

“In addition to the underlying strength of the US economy, the global economic backdrop remains supportive. Both China and Europe are growing nicely, suggesting that global growth is set to accelerate in 2017 after slowing to 3 per cent in 2016. We expect global corporate default rates to remain low and therefore a favourable environment for risk assets like investment grade and high yield corporate bonds.

“In addition, interest rates are likely to remain on an easy setting in the UK, Europe, and Japan causing a widening in interest rate differentials to the US, suggesting a further strengthening of the US dollar versus the majors.

“The main downside risks to the global economy appear to be political developments in Europe and the UK, a major change in US trade policy, or a delay in the implementation of US tax reform and fiscal stimulus.”

Emerging markets to perform well as global economy does not overheat

Tim Condon, head of research, Asia, ING:

“When stock and bond prices move together it’s typically because of a change in inflation expectations, in this instance, down. We regard the re-pricing in financial markets as indicating a reduced probability of the risk scenario of growth surprising on the upside and the Fed being caught behind the curve.

“Bottom line: We expect the Korean won and the Taiwanese dollar to outperform in a weak US-dollar scenario. We remain of the view that emerging market equities and developed market equities will retain their top one and two performance spots among broad asset classes in 2017.”

Fed still behind the curve

Ken Taubes, chief investment officer, US, Pioneer Investments:

“The short end of the curve still offers negative real yields despite full employment, above trend growth and rising inflation conditions. And the economic stimulus promised by the Trump administration has already started to take effect through executive orders rolling back regulations and supporting investment.

“Given these clear improvements and the upward trajectory of both the US and global economies, the Fed risks falling further behind, potentially requiring greater rate increases in the future that could destabilise the markets and economic growth.”

Only one hike to come

Anna Stupnytska, global economist, Fidelity International:

“The Fed game-plan for now appears to be opportunistic hikes when external and market conditions are benign, gradually bringing the policy rate back to neutral (currently seen around 2 per cent, but forecast to gradually rise to 3 per cent in the next year or so)…

“In all, the Fed looks unlikely to ‘take away the punchbowl’ from global growth any time soon. Our base case is only one more hike this year. This is because we are likely reaching a cyclical peak soon, and the likelihood of a China slowdown weighing on global inflation, markets and growth is fairly high.”

(THE BUSINESS TIMES)

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