The most recent interest rate hike by the Fed shows no sign of slowing down the economy or worrying ...
The most recent interest rate hike by the Fed shows no sign of slowing down the economy or worrying the market.
Two weeks ago, the Fed funds target interest rate went up by 0.25% to 5.75%. Since last June there have now been five 0.25% increases.
The minutes of the Fed's policy-making Open Market Committee reveal that many members had favoured a rise of 0.5%, suggesting that the lower rate will not be enough to damp down the robust US economy, now in a record-breaking ninth year of expansion.
Tom Walker, head of the Americas team at Martin Currie, is confident Fed chairman Alan Greenspan will continue to raise rates gradually to try and check the economy but is not going to go for aggressive increases because inflation remains low.
The consumer price index (excluding food and energy) is standing at 2.1%, and Walker thinks any aggressive rise would knock consumer confidence and spending, traditional drivers of the US economy.
He believes this means there will be further 25 basis point rises until growth is reduced to an annualised 3.5%.
Walker feels it will fall to 4.5% this year, down on the 6% annualised figure for the first quarter of 2000.
He says: "The stock market has greeted the rise in interest rates with something of a big 'so what'.
"The concern is that Greenspan might overdo it. The markets are nervous that he is going to cause the economy to slow down too much."
Strong rate rises would be particularly negative for financials, utilities and the housing market, as these sectors traditionally have high debt levels and rely on consumer spending and confidence.
Walker thinks rates will have to reach 7% before there is a negative impact on the technology sector, something Greenspan is not going to let happen. So far, there is little evidence that the Fed's policy is slowing down the economy but David Currie, head of US equities at Edinburgh Fund Managers, is adamant the Fed does have a vital role to play.
The most recent rate rise was expected, hence the absence of immediate impact on the markets.
Like Walker, Currie fears Greenspan could increase rates too far, unwittingly damaging sectors such as raw materials and consumer cyclicals in an attempt to slow down the tech, media and telecoms sectors.
"It is a very real danger," he says. "If Greenspan goes too far to slow the economy down, then he could kill off some of the old economy which is very sensitive to rises in interest rates."
In any event, Currie predicts that investors could be moving away from interest rate sensitives towards growth sectors.
He says: "The new economy is going to continue to perform. There is a very big structural revolution going on, and we are seeing massive sectoral growth which is not being affected by interest rates."
Chris Bowie, investment manager at Murray Johnstone Asset Management and lead manager of the group's gilt, corporate bond and financials bond funds, believes that the 25 basis point rise was not enough.
He says the bond market has already priced in a further interest rate rise in May, and it expects others later in the year.
He adds that even though yields are currently low and the markets have had a good two months, Murray Johnstone views the bond market with caution.
He believes that there is a definite risk that a major event, such as an unexpected rise in inflation, a big shake-out in the economy, or a widening deficit in the current account, could impact on the market.
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