Asset managers’ reactions to Fed rate hike
The Federal Reserve raised interest rates for the second time in three months on Wednesday. It was prompted to do so by strong jobs data, and forecasts that inflation is heading towards its target.
After the rate hike announcement, Pioneer Investments’ CIO, US Kenneth Taubes noted that “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 destabilize the markets and economic growth.”
“The Fed raised rates 25 basis points (bps), as they had clearly signaled. Markets were on balance surprised because many had come to expect that the Fed would increase rates four times in either 2017 or 2018,” Taubes said.
“Instead, they maintained their forecast of three hikes each year. As a result, bond markets rallied, with the 10-year Treasury falling by 10 basis points (bps), and the US dollar falling by over 1%,” he added.
Rick Rieder, CIO of Fundamental Fixed Income at BlackRock, for his part, applauded the Fed for its “courage” in continuing to move rates forward.
“Moving from negative real rates to modestly positive rates is not only still extremely accommodative and economy/market supportive, but it brings the financial system closer to an equilibrium,” Rieder said.
“Such a move is in fact healthy for financial transmission mechanisms that have been impaired by artificially distorted rate levels. Indeed, velocity of money has been muted, pension funds have been impaired by burdensome discount rates, insurance companies weren’t able to write business at reasonable levels, and savers have been penalized.
“As policy continues to normalize, these pernicious influences should abate and confidence in corporate investment may return,” he added.
Roger Aliaga-Diaz, Vanguard’s chief economist, Americas, said: “We’re pleased that the Fed is moving towards normalization, as the balance of risk has clearly shifted. Further, for the second time in a row, we’re seeing the market aligning to the Fed’s expected path, rather than vice versa.”
According to deVere Group’s founder and CEO, Nigel Green, the rate rise by the world’s defacto central bank confirms a new era of higher inflation and higher interest rates.
“Rates are beginning to normalize. Whilst it may take a couple of years or so to get there, when they do the global economy will look very different to how it does today,” Green noted.
For Rich Clarida, PIMCO global strategic advisor, the Fed message is that “even before the potential fiscal boost is factored in, the US economy no longer requires emergency policy rates.”
“The Fed is conveying a level of confidence in the economy as well as reinforcing that the 2% inflation target is symmetric – that is, inflation overshoots are neither more nor less tolerable than undershoots,” Clarida noted.