Stephanie Sutton, investment director – US Equities, Fidelity International, said:
Investment commentators had been earnestly debating the likely timing of the first US policy rate hike from virtually zero for several years now. However, each time an increase appeared imminent, expectations had been dashed owing to either weak economic data or events, such as the recent China-related market volatility. However, this time around economic data and global conditions were supportive enough to allow the Fed to initiate its first interest rate hike in almost a decade. With the first rate hike now behind the market, the focus will turn to the pace of further rate hikes. Whilst gradual rate increases have been priced in, any acceleration in the pace might create uncertainty and volatility.
Further, whilst the hike in itself acknowledges the good health of the US economy, it certainly increases the debt burden on both households and companies. Thankfully, there is little risk of payment shocks or greater defaults post lift-off as the bulk of household and non-financial corporate debt is in fixed rate loans. To illustrate, approximately 90% of US mortgage debt is locked into fixed rates and the modest monetary tightening will not have a major impact. Despite this, the two possible areas of concern include student debt and subprime auto loans as these loans have witnessed high delinquency rates rise in the recent past. However, increased delinquency in these two areas does not really threaten the financial stability of the economy. In addition, a strengthening economy and job growth will help debtors to service these loans.