US Fed likely to tighten before year end

US Fed likely to tighten before year end

The US Federal Reserve is on track to raise rates before year end, with a pick-up in economic activity and positive dialogue emerging from the central bank, says Principal Global Investors.


In a recent economic update – Global Overview: decoupling, divergence – Principal Global Investors said markets now assess the likelihood of a December rate rise at 54 per cent and the likelihood of a March rate rise at 71 per cent.

Principal Global Investors global chief economist Robert Baur said economic data out of the US is strong enough to justify a rate rise.

“There is good potential upside from higher investment, no drag from government spending, little change in the US dollar, and the inventory overhang fading,” he said.

“Some pick-up in activity as inventories decline, unshakable consumer spending, and a couple of decent payroll reports should be enough to lift the clouds and push rates mildly higher by year end.”

Moreover, growth is expected to be in the 2.5 per cent to 3.0 per cent range through the end of 2016. 

Mr Baur pointed out that a Fed lift-off indicates confidence in the economy, and rates at two per cent are too low for solid economic growth. 

In a statement issued by the Fed on Wednesday, an active effort was made by the central bank to indicate that a rate hike is likely in December. 

“The Fed upgraded its economic assessment, removed the worry about the global outlook, and discussed when it would consider raising rates, ie., 'at its next meeting', rather than whether to maintain current levels.”

Mr Baur said US equities fell upon the release of the statement for approximately 45 minutes before rallying strongly – “likely relishing that the Fed finally expressed real confidence in the US recovery”.

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