Investment Strategies

Federal Reserve Hikes Interest Rates - Wealth Management Industry Reacts

Josh O'Neill Reporter 15 December 2016

Federal Reserve Hikes Interest Rates - Wealth Management Industry Reacts

This publication has compiled a collection of reactions to the US Federal Reserve's decision to up its benchmark interest rate.

The US Federal Reserve's decision earlier this week to hike its benchmark interest rate while upping its expectation for the number of rate increases next year has generated mixed reactions from the wealth management industry.

The move, which markets saw a 100 per cent probability of, will increase the target of the federal funds rate – the rate at which banks lend to each other overnight – by 25 basis points, to a range of 0.50 to 0.75 per cent.

By raising the interest rate for the second time in a decade, the Federal Reserve is slowly ending the era of unprecedented monetary policy support in an attempt to allow the economy to prosper without it. During the next three years, the Federal Reserve expects to raise rates three times.

Dean Turner, Economist at UBS Wealth Management:

“While this was universally expected, we shouldn’t forget that this is still a big milestone. It marks only the second interest rate increase in a decade from the Fed. The Fed's anticipation of a faster pace of hikes (three next year vs two previously) and the nudge up in the long-run rate forecast to 3 per cent shows that confidence in the growth outlook is increasing. In recent weeks, yields have moved a long way in anticipation of the changing outlook for policy and the potential for higher inflation. We believe the scope for a disorderly sell-off in the bond market is limited and returns look unattractive. This decision doesn’t herald the end to easy money. Focus will remain on supporting economic growth and not derailing the recovery. Against this backdrop, we are overweight US equities, which are in a good position to continue to make gains in 2017. With monetary policy clearly diverging between the Federal Reserve and European Central Bank, the focus will likely turn to currencies. We think the euro is undervalued relative to the dollar, and the strength of eurozone growth and inflation outlook is under-appreciated. So, notwithstanding today's decision and the likelihood of more Fed hikes next year, we expect to see the dollar underperform the euro in the months ahead.”

Kasia Kiladis, Investment Director for US Equities at Fidelity International:

“The outlook for further inflation continues to be positive due to the likelihood of fiscal expansion and tax reform but also because the labour market is tight and oil prices have stabilised. The frequency and magnitude of further rate hikes will mainly be reliant on the timing and impact of Donald Trump’s pro-growth inflationary policies but also his ability to deploy trade tariffs. Investors continue to be positive on Donald Trump’s fiscal stimulus and tax reform policies which could lead to renewed business investment, thereby, driving productivity and economic growth.” 

Richard Clarida, PIMCO's Global Strategic Advisor:

“Four of the Federal Open Market Committee’s 12 members who had projected two hikes for 2017 at the last meeting appeared to project three hikes for 2017 (and one member who had voted for more than three hikes appeared to vote for three). In terms of the “longer-run dots,” one member raised his forecast from 2.75 to 3 hikes, which was enough to very modestly raise the median for the longer-run nominal fed funds rate from 2.875 per cent to 3.0 per cent. As to the language in the Fed statement, the changes were modest and mostly marked-to-market the reality of the incoming economic data. The statement characterized economic growth as “moderate,” not “modest.” It also acknowledged that measures of breakeven inflation – inflation compensation – had risen “considerably. In sum, four members of the FOMC appeared willing to place at least a modest bet that Trumponomics will justify three hikes instead of two in 2017. For a Fed that is always reminding us that it is “data dependent,” this is at least a bit puzzling, as the Fed projections for GDP growth in 2017 were marked up by only 0.1 percentage point (from 2.0 per cent to 2.1 per cent) and the inflation forecast, at 1.9 per cent, was not revised at all. Go figure.”

David Absolon, Investment Director at Heartwood Investment Management:

‘‘As expected the Fed went slightly more hawkish in projecting the future interest rate path, but it is no game changer. The difference to last December is that this time inflation has a positive impulse. The market reaction in the next few days is not irrelevant, but it will be in January to see whether the market has over-tightened financial conditions.’’ 

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