Rather than cause for concern, the finalisation of the ‘QE3’ program is “good news” for investors, according to Colonial First State Global Asset Management (CFSGAM).
“This is good news as it indicates a degree of confidence in the ongoing US economic recovery from the Fed,” said an economic note by CFSGAM.
“The end of QE3 has necessitated a fairly extensive re-writing of the Fed statement and, contrary to some expectations, the Fed has continued to express some confidence in the economic and inflation outlook,” CFSGAM said.
“This confidence would indicate that despite all the volatility in markets over recent weeks and the declines in inflation expectations, the Fed still remains on course to deliver its first interest rate hike in mid-2015.”
CFSGAM also pointed out that it expects, once the US begins its monetary policy normalisation process, that Fed Fund rates will be around 1 per cent to 1.25 per cent by the end of 2015, “implying four rate hikes from June 2015 onwards”.
“For 2016 we have been expecting the Fed Funds rate to be raised to a 2.5 per cent to 2.75 per cent range by year end,” CFSGAM said.
“Current market expectations are for the Fed Funds rate to be around 0.5 per cent at the end of 2015 and around 1.5 per cent at the end of 2016. To our mind, this remains well below the likely actual outcomes,” CFSGAM said.
