Nigel Green

March 16, 2017: The US Federal Reserve raised interest rates for the second time in three months on Wednesday. It was prompted to do so by strong jobs data, and forecasts that inflation is heading towards its target.

This rate rise by the world’s de facto central bank confirms that we’re in a new era of higher inflation and higher interest rates. Investors will now need to position themselves accordingly.

Rates are beginning to normalise. Whilst it may take a couple of years or so to get there, when they do, the global economy will look very different to how it does today.

With this shifting landscape, investors now need to ask themselves three key questions.

First, is my portfolio truly diversified? Having a well-diversified portfolio is one of the fundamentals of successful investing, but alarmingly, and for a myriad of reasons, many investors are simply not adequately diversified. This puts them at risk and means they are likely to miss out on opportunities.

Being truly diversified across asset classes, sectors and geographical areas, and not trying to be too smart with sector or regional bets, is perhaps more important than ever. The traditional interrelationship between sectors and regions has diminished since President Trump took office.  A lot will be riding on which way the greenback heads and, crucially, which policies are green-lit by Congress.

Second, am I prepared for dollar swings?  In the short term, higher Fed rates will attract overseas capital into the US, especially to those sectors, such as energy and financials that will most likely benefit from Trump’s policies. On the flip side, emerging markets will become less attractive because a strong dollar makes interest and repayment more costly in local currency.

However, the strength of the dollar might weaken again in the coming months.  The markets are pricing in three hikes in 2017 – I think it will be two, which would result in a fall back of the greenback later in the year.

And third, am I prepared for inflation? The American economy might not have a serious issue with inflation now, but we can be almost sure inflation is going to creep up on us.

Investors need to keep some powder dry in preparation for this time as their dollar-buying power will be hit when it finally arrives.

Investors who answer these questions honestly and then take affirmative action will find that they do not need to accept lower returns in this new era of higher rates and inflation.

Nigel Green is the founder and CEO of deVere Group

The post US Fed raises interest rate: Three questions investors need to ask themselves appeared first on International Finance.

February 24, 2017: Several Federal Reserve policymakers said it may raise interest rate ‘fairly soon’ should jobs and inflation data come in line with expectations. This is according to the minutes of the Fed’s meeting released on Wednesday.

“Many participants expressed the view that it might be appropriate to raise the federal funds rate again fairly soon if incoming information on the labour market and inflation was in line with or stronger than their current expectations,” the Fed said in the minutes.

Fed Chair Janet Yellen said it would be ‘unwise’ to wait for too long to raise the rates again. This gave a strong indication that the central bank remains on track to consider raising rates again by the summer.

Prices for US stocks fell marginally following the publication of the minutes and yields on US government debt also dropped. Expectations on when the Fed will next raise rates were little changed, with investors predicting a move in May at the earliest, according to fed fund futures data compiled by the CME Group.

Among voting members in general, there was much less urgency to raise rates with many seeing only a ‘modest risk’ that inflation would increase significantly and that the Fed would ‘likely have ample time’ to respond if price pressures emerged.

The post US Fed to raise rates soon appeared first on International Finance.

The good performance has led to speculation of a further rate hike.

The Federal Reserve had raised interest rates in December. The hike was the second time interest rates were hiked since the 2007-2009 financial crisis.

“Waiting too long to begin moving toward the neutral rate could risk a nasty surprise down the road — either too much inflation, financial instability, or both,” Yellen told the Commonwealth Club of California in San Francisco.

“In that scenario, we could be forced to raise interest rates rapidly, which in turn could push the economy into a new recession.”

Benchmark US Treasury yields rose and the dollar strengthened after the remarks. Yellen said asset valuations, including stock prices in part, reflect expectations that the Fed will normalise rates faster than other central banks.

JP Morgan Chase & Co. Chief Executive Officer Jamie Dimon has predicted that interest rates will rise along with a growing US economy. “I believe America is doing better than people think and therefore interest rates are probably going to be stronger than people think,” Dimon told health investors and executives at the JP Morgan Healthcare Conference in San Francisco.

The post US interest rate hike could come sooner than later? appeared first on International Finance.

 IFM Correspondent

December 15, 2016: Citing an improving economy, the US Federal Reserve raised its key interest rate on December 14 for the first time in 2016 by a quarter percentage point. In a statement after a two-day meeting, the Fed said policymakers unanimously agreed to lift the benchmark federal funds rate – the rate banks charge each other for overnight loans — from 0.4% to 0.6%.

The hike is only the second since 2008 despite an unemployment rate that has tumbled from 10% in 2009 to a near-normal 4.6%. “Our decision to raise rates should certainly be understood as reflecting the confidence we have in the progress the economy has made and our judgement that will continue,” Fed Chair Janet Yellen said at a news conference.

Yellen also said that Trump’s blueprint of cutting taxes and beefing up defence expenses may have been a factor for some policy makers in their decision to raise rates. But she added the details of the plan and how much of it Congress will pass are unknown. “We’re operating under a cloud of uncertainty at the moment,” she said.

The move reflects the Fed’s growing confidence that the economy is on a sustainable growth footing — and its judgment that inflation is becoming a bigger danger to the US economy than sluggish growth or another recession.

The post US Fed hikes interest rate appeared first on International Finance.

IFM Correspondent

November 3, 2016: The Federal Reserve on November 2 hinted at hiking interest rates in December. For now, officials voted to keep rates unchanged following a meeting in Washington. They emphasised that the pace of rate hikes will depend on evolution of the economy.

“The committee judges that the case for an increase in the federal funds rate has continued to strengthen, but decided, for the time being, to wait for some further evidence of continued progress toward its objectives,” the Federal Reserve stated.

Volatility in the financial market due to uncertainty surrounding the result of US presidential election is the reason behind the Reserve’s decision not to hike interest rates immediately. US stocks and the dollar have taken a hit because of this very reason.

The US economy continues to grow in terms of employment as well as overall economic growth. Inflation finally appears to be picking up, although it remains below the Fed’s target of 2%. The Fed stated that it will need more evidence to substantiate that employment and inflation are on track according to the central bank’s goals before proposing a hike in interest rates.

The performance of the economy is creating confidence that it will be able to withstand increase in interest rates. The Fed plans to raise interest rates gradually.

A majority of investors expect the Federal Reserve to hike interest rates in the near future.

The post US Fed hints at rate hike appeared first on International Finance.

Seth Roman

September 02, 2016: The intention of the Federal Reserve Board to raise rates is clear, but it is still a question of when. In her annual speech at the Jackson Hole Summit in Wyoming, Fed Chair Janet Yellen said the data is moving in the right direction and she is philosophically inclined to increase interest rates. Nevertheless, she also indicated the data does not yet support a rate hike.

The US economy is growing at a gradual pace and the jobs market is strong. However, inflation remains a sticking point. Core PCE (personal consumption expenditure), which is the Fed’s primary gauge of inflation, has been slowly rising, but remains stubbornly below the Fed’s 2% target. The July inflation report released on August 26 confirmed that inflation data remains tame, but in a slowly rising trend. Personal consumption rose a seasonally adjusted 0.3% in July from a month earlier. Consumer spending climbed 0.5% in June, 0.3% in May, and 1.1% in April.

Market expectations for one or even two rate increases this year moved higher after Yellen’s speech. Within hours after the speech, the probability of a September hike rose to 42% from 24% a week earlier. Meanwhile, the probability of a rate hike in December increased to 63.6% from 51% one week ago.

Yellen’s speech led to another leg up in short-term bond yields, which have been drifting up in recent weeks in anticipation of rising rates. The sharpest moves have been at the short end of the curve.

Two-year Treasury notes rose to 0.82% from 0.74% one week ago. Although this is down from the year-to-date high of 1.05% at the beginning of the year, the current yield is above the average for the year of 0.77%. Five-year T-bills increased to 1.20% from 1.13% one week ago, and 1.03% on August 4.

It’s worth noting that Libor (London Interbank Offer Rate), which is a key rate used by banks to price variable rate loans, has also been rising steadily this year due mostly to technical factors unrelated to Fed jawboning – more specifically, the movement of cash out of prime money market funds in response to money market reform. Libor could continue moving higher spurred in part by the expectation of a Fed rate increase.

The question now is not if, but when the Fed will raise rates. Jackson Hole revealed little new information, but only confirmed that no matter when it begins, the rate hike will be slow and gradual. The market will closely parse future data on growth, jobs and inflation for any likely impact on Fed policy.

Seth Roman is a portfolio manager with Pioneer Investments

The post Getting closer to US interest rate hike appeared first on International Finance.