23 October 2018
The US Federal Reserve is expected to undertake multiple rate hikes next year as it normalizes the monetary policy. Photo: Bloomberg
The US Federal Reserve is expected to undertake multiple rate hikes next year as it normalizes the monetary policy. Photo: Bloomberg

Fed seen hiking rates three more times in 2016

The US Federal Reserve will follow up on Wednesday’s rate hike with three more tightening moves in 2016, with the first of those initiatives likely in June, according to a prominent fund manager. 

“Recent FOMC forecasts had four hikes in 2016, once per quarter. We expect they will hike at a somewhat slower pace, likely skipping at least one quarter. The Fed does not want to be overly predictable,” said John L. Bellows of Western Asset Management.

“The March meeting is probably too early, but perhaps in June or September, when it will be more clear that growth and inflation are coming in under the Fed’s expectations,” he said in an emailed statement.

As for Wednesday’s move, which was the first rate hike by the US central bank in nearly a decade, Bellows said the step was appropriate as the markets had already priced in the 25 basis point increase.

“Had they not raised it would have been very confusing to the markets, given the fairly clear communications they had been providing,” he said. 

Ken Taubes, head of investment management at Pioneer Investments, said the Fed has “refocused on US growth, employment and inflation, rather than on the impact of rate increases on global economic growth.”

“We believe that global growth may have bottomed, and that the Fed’s protracted approach to further rate increases could reduce the negative impact of rising rates, particularly in light of easy global monetary policies that should support economic growth and markets.” 

Andrew Swan, head of Asian equities at BlackRock Investment Institute, said the Fed “has delivered exactly on expectations: A hike and the start of normalizing monetary policy but with a dovish commentary.”

“Economic numbers, especially US wage data, will now determine the steepness and speed” of future tightening moves, he said.

“Gradual rate increases will lead to a period of normality for rates and growth in Asia… There is however a risk that stronger US data leads to a more hawkish Fed in 2016 which could see more aggressive tightening and with that policy error in a low growth world,” Swan said in a statement. 

Andrew Colquhoun, head of Asia-Pacific Sovereigns at Fitch Ratings, said “there is still a significant wedge between where the Fed is telling us it sees rates going and what the market is pricing in.”

An “out-turn closer to Fed guidance would be a substantial shock” for the Asia-Pacific region where private sector debt levels have risen rapidly and where capital flows have already started to reverse, he said. 

Commenting specifically on China, Colquhoun said “lower Chinese rates might help to shore up corporate balance sheets and domestic demand, but would risk spurring capital outflows seeking rising US rates.”

“The key question for China in 2016 could be whether the country can reconcile potentially conflicting imperatives on domestic and external financial stability,” the Fitch official said.

Impact on Hong Kong

Andrew Fennell, associate director, sovereign ratings, at Fitch said higher US rates are not expected to have a material impact on Hong Kong’s sovereign credit profile.

He noted that Hong Kong has implemented “seven rounds of macro-prudential tightening measures since 2009 to safeguard the financial sector from a property market correction.”

Hong Kong also has significant fiscal buffers in place, with fiscal reserves equivalent to 36 percent of GDP, Fennel noted.

However, if the rise in US interest rates is faster than expected, it could have spillover effects to growth and private consumption, the Fitch official warned.

Property consultancy Knight Frank believes the impact of US rate increase on the Hong Kong property market will be limited.

This small rate increase is not going to significantly impact homebuyers’ monthly mortgage payment, it said.

Even in the scenario when the Fed raises interest rate further in the coming months, the housing affordability ratio will deteriorate only slightly from current level, it said.

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