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

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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.

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December 15, 2016: Investors do not need to accept lower returns because of the US Federal Reserve’s rate raise.

The Fed on December 14 announced a 25bp rate hike at the FOMC meeting. This takes the key Fed funds rate up to a range of 50bp-75bps.

The rate rise is only the first increase this year and just the second since June 2006. It is significant because it gives further weight to the considered argument that the era of very low inflation and interest rates may be ending. And not just in America – the world’s largest economy – but globally too, as the policies pursued by central banks since the financial crash of 2008 come under increasing attack.

And despite the Fed appearing to want to proceed cautiously, and not threaten a constant rise in rates during 2017, many investors believe there are more hikes to come due to the strength of the US economy and the likely policies of a Trump presidency.

Whilst there might be some degree of nervousness about the Fed’s move, and the likely dawning of a new era, investors do not need to accept lower returns.

There will be winners and losers, and those investors who have a good fund manager, who selects the right investments at the right time, will surely profit.

Ensuring proper portfolio diversification will also be essential to taking advantage of the rewarding opportunities and sidestepping the potential risks.

Savvy investors are likely to favor the dollar over other currencies, since higher Fed rates will attract overseas capital into the US and favour those sectors that will most likely benefit from the Trump stimulus and de-regulation that he has promised.

These include US financials – which are also benefiting from the steepening US yield curve – energy and pharma stocks. Japanese and European exporters will benefit from the strong dollar, though investors may want to hedge their euro and yen currency exposure.

It can be expected that they will also seek to avoid emerging markets. Higher US dollar borrowing rates threaten the viability of almost $9 trillion of emerging market corporate debt.  This is because a stronger dollar makes interest and capital repayment more expensive in local currency and because when debt needs to be rolled over, the interest demanded may be much higher.

No matter what the Fed does with interest rates moving forward, investors who are well prepared and properly advised can look to build wealth as we move beyond the era of very low rates and inflation.

Nigel Green is the founder and chief executive of deVere Group

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 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.

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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.

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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

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December 21, 2015: The US Federal Reserve’s decision to raise interest rates was based on an assessment by Fed policymakers that the US economy was headed in the right direction and ripe to handle the long road to monetary normalisation, BBVA Compass economists say in their latest report.

“Federal Open Market Committee members unanimously agreed that this was an appropriate time to raise the federal funds rate,” writes BBVA Compass Senior Economist Kim Chase. “The Fed has overcome a huge obstacle with this first rate hike, but now they need to deal with the reaction and hope that the economy continues to move along in line with their outlook.”

The report notes that positive economic indicators — among them an improved labour market, with a 5 percent unemployment rate and pickup in wage growth — overrode concerns about global volatility and low inflation, leading all Federal Open Market Committee members to vote in favour of a liftoff.

US Federal Reserve Chair Janet Yellen was quick to emphasise any future hikes would be gradual as policymakers allow short-term volatility to settle and are able to assess the actual impact of the first rate hike. To have a better idea of what exactly FOMC members will be looking out for, a review of the minutes from Wednesday’s meeting will be necessary, Chase writes. The minutes are expected to be released in early January, 2016.

“As long as their outlook remains intact, the Fed can continue along with their data-dependent strategy and take additional, albeit gradual steps toward future interest rate hikes, with only two more rate increases to close out 2016 at 1.0%,” said Chase.

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