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Fed has good reason to hike rates by December

Ken Leech, Western Asset Management’s CIO said that while accommodative monetary policy is critical in the current climate of weakened demand, the US Federal Reserve has a good reason to hike interest rates before the end of the year.

Leech was commenting in response to Federal Reserve Chair Janet Yellen’s comments on the US economy. On 24 September, Yellen noted that the Fed has a dual mandate to maximise employment and keep prices stable. She added that “achieving these conditions will likely entail an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter”.

Noting that Western AM changed its own call, which originally contemplated a June or September rate increase, Leech said global instability was distracting the Fed from its internal goals.

“Not only has unemployment [in the US] declined, it’s declined all the way to where we are starting to get into the range the Fed considers close to full employment. That clearly suggests the Fed not only should be raising rates now, but could have been raising rates much sooner,” Leech said.

Jim McCaughan, CEO of Principal Global Investors, shares a similar view with Leech. He told Fund Selector Asia in mid-September that the FMOC should have increased rates when they met on 17 September. He noted that the US economy is strong enough for a normalisation of rates.

Like Leech, McCaughan reckoned that a rate hike is likely to take place this year and he forecast that it could take place in December. The FMOC has two more opportunities to tighten interest rates this year. The first is on 27-28 October and again on 15-16 December.

Leech forecast that while the fed funds rate will move to a higher level, the increase would be very, very gradual.

“The policy path is going to be one of normalising rates in a very slow fashion. The bond market is therefore going to have reasonably low rates for longer than market participants might have otherwise thought at the beginning of the year,” Leech said.  

Part of the Mark Allen Group.