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FED Up!

Summary

As we reach the turning point in the interest rate cycle in the US and not too far off in the UK; market commentaries, newswires, debt fund managers et al, are getting in a flap about when the US Federal Reserve will signal its first rate rise since December 2008. Similarly, in the UK many column inches have been written on when base rates will be lifted by the Bank of England.

As we reach the turning point in the interest rate cycle in the US and not too far off in the UK; market commentaries, newswires, debt fund managers et al, are getting in a flap about when the US Federal Reserve will signal its first rate rise since December 2008.  Similarly, in the UK many column inches have been written on when base rates will be lifted by the Bank of England.
With each set of data the newswires issue ‘breaking news’ alerts and summon up financial market pundits as to whether a rate rise will happen in the US in September or December this year and for the UK will it be this year or the first quarter of 2016?  It may be good for filling up time or space on various branches of the media but it pays to take a step back.
What do we know?  Rates in the US and the UK are going up and despite the respective central banks’ best efforts to give ‘forward guidance’; there’s no need to panic.  We are told that this is the start of an interest rate normalisation as the US and UK economies no longer need abnormally low short term interest rates.  Actually what is more important to an economy’s future path is the availability of money at reasonable rates rather than limited availability at very low rates which was the case post the financial crisis.
So official short-term rates are likely to rise in the US this year, the month is largely immaterial unless you’re a trader or hedge fund.  That would be because the economy is healthier.  If not a rate rise will be put back and given that global financial markets are suffering from risk indigestion, that is quite possible.  But, we are told that rate rises will be gradual to ensure the US and UK economies continue their recovery.
Are markets worried that inflation might take hold?  Not if you look at the recent moves in long dated government bond yields.  According to Bloomberg, US Treasury ten year yields have fallen 23 basis points to 2.01% over the past month and UK ten year gilt yields have fallen 15 basis points to 1.81% over the same period – hardly an indicator of a future inflation scare but possibly a reflection of a safe haven in current markets.
So US and UK official short term rates are going up – sometime soon and not by a lot – as long as the economic data warrants it.
What makes for good TV and headline writers’ copy is best overlooked in favour of more important considerations like the shape of the yield curve and equity valuations.

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