The debate in financial markets has been dominated by the likely timing of interest rate rises in the US and to some extent the UK.
Many economists feared the US economy was just
not strong enough to cope with higher interest rates, using phrases such as
“failure to reach take-off velocity”, with the obvious implication being that were rates to rise, the economy would come back to earth with a crash.
The more bullish economists have tried to counter this with a stream of evidence that the current growth rate is pretty robust and have therefore called for the interest rate lift-off to begin.
The debate about when interest rates will rise is still raging, but the market appears (currently) comfortable that 0.25 per cent base rates (known as Fed Funds) in the US are too low given there is no longer an economic emergency.
Earlier in the year, it had been thought reasonably likely that interest rates might rise in 2015, but Janet Yellen, chair of the board of governors of the Federal Reserve System, appeared unwilling to give any firm guidance that this might be correct.
Nevertheless, the market began pricing in the likelihood of interest rate rises as early as June, but recent economic data for Q1 has been more sluggish than expected, mostly due to another severe winter that impinged upon economic activity.
We remain reasonably confident that Q2 data will show a rebound to confirm the US economy remains in good health.
So when will ‘lift-off’ actually happen?
Regular readers of this column will know that I have been very bullish on the US economy and therefore promoted the view that interest rates should rise, otherwise risking inappropriate monetary settings that could create the next financial problem.
There had been sufficient strength of data to allow June to be the date for the first interest rate rise, but some of the voices supporting this have become more concerned about Q1 data and have started to promote September as being more likely.
The San Francisco Federal Reserve has released Q1 GDP data adjusted for the weather issues, which means the official Q1 GDP of 0.2 per cent would be adjusted to 1.8 per cent – hugely better and, if correct, it would support the assessment that the US economy is in fine health.
The date of the first interest rate hike does appear to be data dependent, as Ms Yellen constantly reminds us, but the data appear to be good so the market needs to be ready for a rise.
This is probably why we have seen the weakness in bond markets over the past three weeks, but I suppose the surprise is that bonds across the globe have been delivering negative returns, not just US ones.
I suspect September is more likely, but the important fact is that they are going up. This is good news as it reflects robust economic growth is being recognised and policymakers are behaving prudently.