The Federal Reserve’s decision to keep rates at historic lows has not proved as beneficial for equities as some expected - and expectations of when rates will rise remains as diverse as ever.
Fed chair Janet Yellen stated that growth was “strong” and labour levels would improve further in the coming years, with inflation also likely to be lower in 2015 and around the same going into the new year.
But the central bank downgraded its growth outlook to 1.8%-2.2% from 2.0-2.3%, causing equities to lose ground today (September 18).
The FTSE 100’s fall of 1.4 per cent, for example, appears to question the theory that no hike would prove positive for equities.
A rate hike was predicted to be a 50/50 decision, but few were surprised by the Fed’s caution. Wouter Sturkenboom, senior investment strategist at Russell Investments said: “the delay by the US Federal Reserve to raise interest rates wasn’t all that surprising and caution for the time being was a good choice.”
Uncertainty was the main reason produced as to the reason rates didn’t change. Anna Stupnytska, global economist at Fidelity Worldwide Investments, pointed to ”the recent tightening in US financial conditions”, as well as “the state of the Chinese economy and vulnerabilities of other emerging markets”.
The “turbulence in financial markets and associated rise in the dollar” was also blamed for the decision by Jeremy Lawson, chief economist at Standard Life Investments.
Mr Lawson added: ‘The committee also appears to be taking more signal from the decline in market measures of inflations expectations than was the case earlier in the year.’
Investors and economists remain divided as to when rates will eventually rise - and also as to the extent of these hikes.
“The Fed will raise rates in 2015 and [we] believe that December is now the most likely time for this” said Felix Wintle, head of US equities at Neptune Investment Management.
Mr Wintle added: “Whilst the language accompanying the decision was dovish, we believe that rate rises may come quicker than the market expects.”
Mr Sturkenboom predicted that “the initial hike will be modest and is likely to be 25 basis points in December but our expectations are a bit more aggressive in how we see rates rising from there.
“Our forecasts are for Fed fund rates to increase by about 1% per year.’
The view that rates are likely to rise in December is the recurring message, but some such as Ms Stupnytska note that “risks are skewed towards the hiking timeline shifting into 2016 altogether.”
Mr Lawson added: “we think that a further deterioration in foreign economic conditions, or domestic financial conditions, would push the first rate increase out into 2016, especially if domestic indicators also lost momentum.”
But Ian Kernohan, chief economist at Royal London Asset Management, said a hike next month - when the policy decision will not be accompanied by a press conference - could yet take place.
“The accompanying statement suggests that a hike is still very much in the offing, possibly in October, however there may be yet another reason to hold off next month,” he said.
