“It seems inevitable that the Fed will put up rates in the coming months and so, for us, the more pertinent questions relate to the rate and rapidity of hikes rather than when the first one takes place,” Klempster continued. “The Fed needs to balance the desire to not upset the status quo with the need to start to normalise interest rates at some point. While the markets will likely fixate on the yes / no decision this week and the minutiae of the accompanying statement our view is that this is only part of the story. It is what happens after the first move that could be of far greater import.”
James Penn, senior portfolio manager at Thomas Miller Investment says the Fed cannot base its decision solely on the US economy, with the issue complicated by the march of globalisation.
“There is no doubt that we are at an interesting juncture with the Federal Open Markets Committee meeting this week to discuss the US interest rate,” he said. “The US has maintained a zero interest rate policy since March 2009, in an effort to dig the economy out of its hole, promote growth and increase lending throughout the economy. Therefore increasing rates will be a big, not to say momentous decision.
“A steep hiking cycle, with interest rates moving up more rapidly than is currently assumed, would upset not just bond markets but equity markets too – and markets well beyond those of the US itself,” Penn continued. “Clearly, the Federal Reserve isn’t going to raise rates if it will jeopardise the recovery. But there is the danger of ‘policy error’, where central bankers overestimate the strength and nature of the recovery, and likelihood of inflation picking up in the future.”
Whatever the Fed decides and says this week one thing is for sure, in the age of central bank driven markets, it will not be the end of the story.
