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Hermes reacts to the Fed's decision to raise interest rates

Home / Press Centre / Hermes reacts to the Fed’s decision to raise interest rates

Neil Williams, Group Chief Economist
14 June 2017
Macro Economics

Neil Williams, Group Chief Economist, Hermes Investment Management:

This hike to 1¼% had been well flagged, and should pretty much be baked into asset prices. However, it reminds us that the Fed remains the test case for whether central banks can ever ‘normalise’ rates. We expect it to try, but fail - hiking the funds target just once or maybe twice more in future forecast-round months. With the lagged effects of previous hikes yet to come through - it takes an average 18 months before rate hikes affect consumer spending in full - delayed tax cuts, potential protectionism and cold winds elsewhere, this should mean a ‘peak’ rate under 2% - way lower than the historic average of 5%. Thus, we may be facing another two years of negative real policy rates in the US and UK.

Running rates this low would make the FOMC uncomfortable unless they pull on their ‘second lever’ – QT (quantitative tightening). By doing so, they may not have to hike rates as far as markets assume, especially if the dollar tightens for them. Otherwise, the US’s eight-year expansion - its third longest ever from trough to peak - may not in summer 2019 become its longest ever.

Helpfully, the FOMC is now debating whether to start reducing the QE stock later this year. This is the logical next tightening step, but is the gentlest possible form of QT. Asset sales would be deferred, but their replacement-rate on the balance sheet tapered increasingly every three months. However, what it will do is allow them, in tandem with interest rate rises, to provide additional tightening ‘by doing nothing’.

For further information on this topic, please read Neil’s quarterly Economic outlook.

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Neil Williams Group Chief Economist Neil joined Hermes in August 2009 and is responsible for Hermes’ economic research. He has a forward-looking approach to generate investment strategy ideas. Neil adopts top-down methods – macro and market analysis to identify interest rate and credit value, and sovereign default risk. Neil began his career in 1987 at the Confederation of British Industry (CBI), becoming its youngest ever Head of Economic Policy. He went on to hold a number of senior positions in investment banks - including Director of Bond Research at UBS, Head of Research at Sumitomo International, Global Head of Emerging Markets Research at PaineWebber International, and, before coming to Hermes, Head of Sovereign Research and Strategy at Mizuho International. Neil has 30 years’ industry experience and earned an MA in Economics in 1986 from Manchester University, having the previous year completed his BSc (Hons), also in Economics, from University College Swansea.
Read all articles by Neil Williams

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