Janet Yellen championed the strength of the US recovery to congress on Wednesday with a strong indication that the Fed will be raising rates this year.
While making the argument for tightening policy ‘sooner rather than later’, Yellen held back from communicating a specific month for the move. This comes as ECB President Mario Draghi opted to keep rates on hold on Thursday.
In its latest report, London-based global liquidity data provider CrossBorder Capital said in early July the Federal Reserve’s monetary base had slipped to $3.87 trillion from its April peak of $4.13 trillion.
'This looks like preparation for a September interest rate rise,’ company founder Michael Howell said. ‘The flagging US economy, evident from latest data, will mitigate rather than stop this move.’
His comments are in response to US growth faltering in the first quarter and the IMF calling for a delay to any US rate hikes until there are clearer signs of a pick-up in wages and inflation.
The IMF has previously warned of the impact a rate rise, arguing it could stall growth and negatively impact emerging markets as was seen in May 2013’s taper tantrum.
Mind your step
Guy Miller, head of macroeconomics and chief market strategist at Zurich Insurance, is equally conscious of the consequences of another central bank policy mistake.
'There is nobody globally, other than the US, that is seen as being in recovery mode and that can be snuffed out quite quickly by a policy error, such as raising rates too early. We’ve seen this recently in Sweden, with the ECB and in New Zealand.’
New Zealand is now aggressively cutting interest rates to support its flagging economy, which has been hit by falling dairy prices and low inflation, while Sweden went deeper into negative rates territory at the start of July cutting rates to -0.35%.
Miller’s base case, however, is that a cyclical recovery will take place. He said there will be no ‘secular stagnation’, as former treasury secretary Lawrence Summers has defined it, but instead a gradual normalisation of policy with better earnings beginning to come through.
Ready for a rise
RWC’s Davide Basile, is already positioned for the US rise. The convertible bonds specialist and manager of the group’s Global, Asia and Core bond funds told Citywire Global that he is positive on the US recovery.
‘We’ve been of the view that the US economy is improving, we see that in jobs data. We do think that a rates rise will happen this year whether it’s in September or later on I don’t think really matters, the magnitude is what’s more important.’
‘Just remember that we’re coming from a very low base, so a modest increase in rates and a modest pace after that is more than acceptable.’
The IMF, Basile said, has a different mandate and is looking at the risks of a rise from a non-US perspective. Improving news out of the Greece, he thinks, may however have helped Yellen to go on this path.
He said a low duration exposure is the correct move given this scenario and has positioned his funds accordingly. ‘From a convertible bonds perspective higher rates have historically gone in hand with more issuance. We are certainly looking forward to that,’ he said.