Fund managers and market commentators have amended their view on the timing of a rate hike by the Federal Reserve after its open market committee (FOMC) minutes revealed doubts a suitable environment would be hit next month.
There had been a broad market consensus that the rate rise would be actioned in September, but recent economic activity in China along with other events have forced market participants to think again.
“There were enough caveats to make us think that September was most likely off the cards.” —Mark Holman, 24 Asset Management“Whilst [the FOMC] did acknowledge that economic conditions ‘were approaching that point’ where a rise in borrowing costs could be sustained, there were enough caveats to make us think that September was most likely off the cards,” said Mark Holman, CEO of bond manager 24 Asset Management.
Holman noted the Chinese slowdown and slump in oil price that had taken place since the FOMC’s meeting in July and how these would have affected growth in the US economy.
“What really tipped it for us though was the lack of any meaningful guidance as to the increased likelihood that September 18 would be the date of the first hike,” he said. “Janet Yellen has gone to enormous lengths to ensure that another taper tantrum does not occur when the Fed does act.”
David Page, senior economist at AXA Investment Managers (AXA IM), said his company had revised its interest rate hike expectations from September to December, citing the same events and concerns.
“The shift in our view reflects the material downgrade to the short-term inflation profile in recent months,” said a report by Page’s team. “Falling oil prices, surprisingly weak wage growth and a sharp rise in the dollar have combined to lower the inflation outlook over the coming quarters. These developments appear inconsistent with Fed Chair Yellen’s rate rise pre-requisite of ‘reasonable confidence’ that inflation will return to mandate-consistent levels in the coming years.”
Page said AXA IM’s view on future rate rise remained the same, however, “envisaging three 0.25% rate hikes in 2016. This would see the Fed funds target range at 1.00-1.25% by end-2016.”
Deutsche Bank’s Global Head of Fundamental Credit Strategy Jim Reid said markets were “slightly lost, upset, and confused”, citing the probability of a September hike falling to 38% from 48% 24 hours earlier and 54% at its recent peak on August 7.
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