Fed hike to 'normalise' US economy: Vanguard

By Taylee Lewis
 — 1 minute read

The US Federal Reserve’s decision to raise rates for the first time since 2006 signalled the start of a gradual rate rising cycle, and is likely to restore “normalcy” to the US economy, says Vanguard.

Vanguard global chief economist Joseph Davis noted that the rate rise “marks the beginning of the normalisation of the US economy”.

“Very rarely (if ever) have central banks successfully exited the zero bound and quantitative easing; we believe today's US Federal Reserve will ultimately prove the first to do so,” Mr Davis said.


“As this has been a widely anticipated decision, we do not expect any material impact on financial conditions in the short term. Indeed, we view the Federal Reserve's decision as an unequivocal positive for both long-term investors and for savers.”

Western Asset Management portfolio manager John Bellows argued that markets were ready for the 25-basis-point rate hike, also stating that it is likely to be advantageous for both investors and bond markets.

Regarding the Fed's future policy direction, PIMCO managing director and global strategic adviser Richard Clarida argued that the policy path will be based on incoming data.

Mr Clarida said the Fed’s monetary policy is likely to be “informed” rather than “dependent” on data, meaning that further tightening will be gradual.

Moreover, in an economic update, HSBC Global Research said “dovish elements” within the Fed’s official statement also suggest that a gradual tightening process will be employed.

“The statement talked of “gradual adjustments”, echoing a dovish Fed catchphrase that has become popular of late,” HSBC said.

HSBC also said three additional “dovish” aspects accompanied the statement – an emphasis on future inflation over the labour market, reference to financial and international developments, and the observation that the federal funds rate is set to remain below levels expected to eventuate in the long-run.

“The statement also dropped reference to the 'next meeting', reassuring markets that rate hikes at consecutive meetings would be unlikely for now.”

HSBC added that although the Australian dollar is likely to see some support from yesterday’s announcement, investors should stay away from chasing the Australian dollar.

“We would not chase the commodity currencies too much higher as they are likely to face verbal intervention from their central banks, especially as commodity prices remain at such low levels historically.”


Fed hike to 'normalise' US economy: Vanguard
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