Renewed support for the economy in the US is as likely as a rise in interest rates, according to a counter-intuitive view held by fund giant BNY Mellon.
The US Federal Reserve has officially halted the purchasing of government bonds and other financial securities as part of its quantitative easing programme, but the fund management firm believes there is every chance of it being restarted this year.
Many experts wrongly predicted interest rates would rise in the US last year, but the consensus has now settled on a rise in the first half of 2015.
This growing expectation is expressed through the recent strengthening of the dollar, reversing the greenback’s weak performance for much of the past decade.
“Our view on the US is that given the way things are going, quantitative easing is as likely as a rate rise in 2015,” Peter Hensman, global strategist at BNY Mellon subsidiary Newton, said.
Part of the rationale for this view is the contraction in the levels of yield offered by fixed rate bonds and by inflation-linked bonds, known as the break-even inflation rate.
Economists at the asset manager have found the break-even inflation rate on five-year bonds, calculated by looking at the yields of five-year fixed rate bonds and five-year inflation-linked bonds, was 1.2 per cent at the end of December.
This is lower than the 1.4 per cent rate that led the Federal Reserve to start its second round of support for the economy.
Some of the first economic data published this year has also been slightly negative. The latest figures from the Institute for Supply Management showed the purchasing managers’ index fell to 55.5 in December, down from 58.7 in November and below economists’ forecast of 57.4.
On top of that, the price of Brent crude oil has continued to drop aggressively and last week fell below $50 per barrel.
“The Fed believes the decline in the break-even inflation [rate] and the decline in oil price is a short-term effect that will reverse,” Mr Hensman said.
The economist added the Federal Reserve expected nominal GDP growth in the US – which does not take inflation into account – to be 4.7 per cent in 2015, but he thought this figure “feels a bit high to us”.
“The market is going to remain much like it did during the crisis period where we keep on seeing disappointment,” he said.
James Lydotes, portfolio manager at Boston Company Asset Management, another BNY Mellon subsidiary, believes interest rates could stay low until 2020, providing ballast for the view more easing is as likely as a rate rise in the short term.
“Rising inflation, which would be a prompt for the Federal Reserve to hike interest rates, is not expected to come into play,” he said.
While the view may be that more economic support is as likely as a rate rise, Mr Hensman does not necessarily think this would be the best course of action.
“We are doubtful that quantitative easing creates the virtuous cycle of growth that we are told it generates,” he said.
“You don’t solve the problem of debt by piling on more debt. All they are doing is creating a short-term burst of activity and we are not convinced it creates long-term growth.”
