‘The Fed needs to come off its painkillers’

24th November 2015


Enzo Puntillo, head of fixed income at GAM in Zurich, looks at the growing likelihood of a rate rise from the US in December…

The US economy is not particularly strong, neither in absolute nor in relative terms compared to other cycles.  Structurally, lower demographic growth and lower productivity are the drivers behind the absolute low growth level. Cyclically, data suggests that weak oil sector investments, fading global economic growth and a strong US dollar are creating some headwinds for the US economy.

The QE and zero interest rate policy have done their job in the US, and there is nothing they can add at this point. I think the Fed should really start to move away from giving the US economy `painkillers’ to something more energising.

In this regard, the element often forgotten is interest income of households. For obvious reasons that has been at record lows in recent years. But if we look at the previous rate-hike cycle of the Fed, there was a 4% to 4.5% increase in household income because of interest income. Even though we’re unlikely to go to the top interest rate levels of the last cycle, higher interest rates could add to household income without costing too much on the debt side, and benefit the economy.

The first interest rate increase in December is becoming very likely. However, we have to differentiate between the first announcement of an interest rate increase and the start of the tightening cycle. I’d argue that we’re actually already some way into this tightening cycle, which started at the tapering announcement in 2013.

Historically, the first hike has often led to the dollar losing some of its strength. Whether we see dollar weaken this time round, though, is a question mark, since other central banks will probably take a while longer before they start to raise interest rates.

Nothing in this material constitutes investment, legal, accounting or tax advice and should not be construed as a solicitation, offer or recommendation to acquire or dispose of any investment or to engage in any other transaction The statements and opinions in this material are those of the author at the time of publication and may not reflect his/her views thereafter.


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