The Federal Reserve’s anticipated and well-signalled decision to increase interest rates has been met with relief from fund managers who welcome the move.
The US central bank announced a 0.25% increase to 0.5%, which marks the first change in the benchmark rate since ultra-low interest rates were first adopted seven years ago. Read the full story here.
The Federal Open Market Committee and its chair Janet Yellen were highly criticized for holding fire in both September and October when it felt that volatility in global markets and US economic data did not allow for a rate hike.
Julien Scholnick, portfolio manager at Western Asset, said: ‘Leading up to this December meeting the stars really aligned. You have data internationally and domestically making sufficient improvement, market probability moved up to 80% in expectations, and the Fed leadership and really indicated in recent communications to the market that December was a high probability event.’
‘They didn’t want to disappoint the market,’ added Scholnick, who added that the Fed did not want to face the same market reaction that followed the European Central Bank’s policy announcement earlier this month. The market was expecting a greater cut in interest rates and an expansion of the size of the bond-buying programme.
‘[The ECB] indicated they would be extremely accommodative and they were a fair amount less so and you saw a violent reaction. The Fed looked at that and did not want to experience anything remotely close to that volatility.’
Co-director of global fixed income at Eaton Vance, Eric Stein, said the Fed’s action shows they want to slowly normalize policy.
‘Zero is an emergency rate and they needed to wean the economy off an emergency rate. When you take a patient off a certain medicine you don’t want the patient to get sicker, you want them to stay the same, keep progressing, keep getting better but without the medicine.
‘I think that’s exactly what the Fed is doing here,’ he added. ‘To an extent the medicine is still there, they’re only moving 0.25 to 0.5 bps.’
He added Yellen’s comments were not as dovish as expected, proving this will be a flexible hike that will allow the Fed to hike significantly should the conditions warrant.