Bassanese's Market Insights: Fed getting ready to hike | BetaShares

Bassanese’s Market Insights: Fed getting ready to hike

BY David Bassanese | 18 December 2014
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There appears much confusion in markets following changed language by the US Federal Reserve after the December FOMC meeting.

The Fed’s latest statement dropped reference to keeping interest rates on hold for a “considerable time” following the end of its quantitative easing program in October, and instead suggested it “can be patient in beginning to normalise the stance of policy.”

Yet the Fed then also said this change in language was “consistent with its statement” in October.  And in her follow up press conference statement, Fed chair Janet Yellen defined “patient” as implying “the Committee considers it unlikely to begin the normalisation process for at least the next couple of meetings.”

In effect, Yellen has signaled the Fed could raise interest rates as early as April (the next two Fed meetings are in January and March), which would be notably faster than the market currently expects.

Confused? Our take is as follows:

  • Yellen is probably still contemplating a hike around mid/late 2015 – and in that sense, nothing has changed. That said, as each month passes, we get closer to this “lift-off’ point, meaning the Fed needs to adjust its language – even though its stance (i.e. the expected timing of interest rates increases) may have not strictly altered.
  • Yellen has signaled the possibility of an earlier move – though not likely before April – if economic conditions improve faster than currently expected.
  • We still see the risks as pointed toward the Fed moving earlier rather than later, due to gathering momentum in the US economy.  For more on this see our earlier note here.
  • Indeed, we argue the Fed is wrong to be holding back policy tightening due to still low inflation, as the US economy is enjoying a powerful positive supply-side shock (due to enhanced global competition and falling commodity/energy prices) – that is both boosting economic growth and lowering prices.  By misdiagnosing the problem of low inflation as reflective of lingering weak demand, the Fed risks keeping interest rates too low for too long, and accentuating asset price bubbles.

 

 

3 Comments

  1. herbert  |  December 28, 2014

    Appreciate oomments as always

  2. In the HVST fund, in respect of the re-investment plan, do the dividends accumulate until the value of one share is reached.

    1. BetaShares  |  January 12, 2015

      Hi John,
      In relation to HVST, we do offer a Distribution Reinvestment Plan (DRP) which unitholders can elect into. The unitholder can choose to reinvest either wholly or partially the monthly distributions into new units in the Fund. Should it occur that the value of the accumulated distribution is not the value of the unit price of an individual unit, then that balance shall be held over until the next distribution.

      Hope that helps

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