Anticipated December increase seen to challenge investors used to Fed just ‘standing pat’
In a newly released video note, analysts from Manulife have predicted a December interest rate hike from the Federal Reserve, a move that may officially take global financial markets away from its years-long low-interest narrative.
“We do anticipate a Fed rate hike of 25 basis points in December, the next meeting,” said Manulife Investments’ Philip Petursson. “[T]hat will set a path for incremental rate increases in 2017 of maybe two or three additional.”
While the increment does not seem monumental, Petursson does foresee it to be something of a jolt to investors. “[T]he opportunity has been there for the Fed to raise rates in my view over the past [couple] of years in terms of low unemployment, wages growing, labor market being favorable to a rate increase and the Fed just standing pat,” he said. “[T]he markets have been reacting to it: it’s been not unlike the taper tantrum of 2013 but this is more Fed watching, [observing] what are they going to do.”
“I think [the increase in December] will result in some additional market volatility,” Petursson said, adding that it would result in an increase in the greenback and temporary decreases in the loonie, crude prices, and gold prices.
Aside from economic indicators, Manulife Private Wealth’s Sam Sivarajan sees historical precedent supporting the case for a rate hike. “If you look at over the last 30 years, there have been five Fed tightening cycles,” he said. “In all of those tightening cycles, it’s been because of improvements in the labor market [and] in the underlying fundamentals, and less to do with inflationary pressures, and I would say that’s the exact situation we’re seeing right now.”
Sivarajan also said that in four out of the past five tightening cycles, the initial hike was followed by an increase in the markets within six to twelve months. “[T]he Fed feeling confidence to raise the rates at this stage actually should give investors confidence that the training wheels of the economy can be taken off.”
But while history provides reason for optimism, it also provides a basis for caution. “[W]e do anticipate that markets will respond favorably I think over the first year [after this next hike]… going forward, we tend to see the Fed raising rates into the next recession,” Petursson said. “Usually the end of [a] tightening cycle comes with [a] recession, and that’s what we might expect into the next three or four years.”
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“We do anticipate a Fed rate hike of 25 basis points in December, the next meeting,” said Manulife Investments’ Philip Petursson. “[T]hat will set a path for incremental rate increases in 2017 of maybe two or three additional.”
While the increment does not seem monumental, Petursson does foresee it to be something of a jolt to investors. “[T]he opportunity has been there for the Fed to raise rates in my view over the past [couple] of years in terms of low unemployment, wages growing, labor market being favorable to a rate increase and the Fed just standing pat,” he said. “[T]he markets have been reacting to it: it’s been not unlike the taper tantrum of 2013 but this is more Fed watching, [observing] what are they going to do.”
“I think [the increase in December] will result in some additional market volatility,” Petursson said, adding that it would result in an increase in the greenback and temporary decreases in the loonie, crude prices, and gold prices.
Aside from economic indicators, Manulife Private Wealth’s Sam Sivarajan sees historical precedent supporting the case for a rate hike. “If you look at over the last 30 years, there have been five Fed tightening cycles,” he said. “In all of those tightening cycles, it’s been because of improvements in the labor market [and] in the underlying fundamentals, and less to do with inflationary pressures, and I would say that’s the exact situation we’re seeing right now.”
Sivarajan also said that in four out of the past five tightening cycles, the initial hike was followed by an increase in the markets within six to twelve months. “[T]he Fed feeling confidence to raise the rates at this stage actually should give investors confidence that the training wheels of the economy can be taken off.”
But while history provides reason for optimism, it also provides a basis for caution. “[W]e do anticipate that markets will respond favorably I think over the first year [after this next hike]… going forward, we tend to see the Fed raising rates into the next recession,” Petursson said. “Usually the end of [a] tightening cycle comes with [a] recession, and that’s what we might expect into the next three or four years.”
Related stories:
Gold haven shunned despite November turbulence
What is Russell Investments’ Canadian outlook for 2017?
