The fear among market commentators of a slow raising of rates by the Federal Reserve is over-stated and a gradual and steadier rate would be more beneficial for economic growth.
That is the view of Rick Rieder, Citywire AAA-rated manager and chief investment officer for fundamental fixed income at BlackRock.
Rieder, who previously discussed why the record low rate was hurting US growth, made the comments in the wake of the Federal Reserve issuing a statement on July 29 following its June meeting.
The latest announcement, Rieder said, leaves the door open for rates normalisation by the end of the year, given the improvements in the labour market. However, the pace of improvement is under close scrutiny, he said.
‘Chair Yellen suggested that waiting longer to begin normalisation might imply the need to tighten faster and that she believes tightening sooner in a more gradual and deliberate manner is likely the more prudent course of action.’
‘Moreover, if the FOMC does not begin this process soon it would be very difficult to see how its SEP [Statement of Economic Projections] for the coming couple of years could ever be achieved.’
Rieder said this projected slow pace of increases had unnerved some investors but this was misguided.
‘As to the risks of a slowly rising policy rate path for the economy, we think some market commentators have exaggerated them. In our view, the normalisation of rates could actually be a benefit to economic growth.’
‘Further, keeping rates at excessively low levels, while perhaps beneficial for markets, also raises risks that might threaten to undermine the economic recovery. Thus, the time to start moving away from these “emergency rate” levels is clearly at hand.’
Rieder said all rates rises had be considered with the fact the Federal Reserve is increasingly dovish in mind. This means each rates rise will be taken with upmost consideration, especially the first one.
‘So despite the fact that our proprietary “Yellen Index” of labor market indicators (as they relate to the Fed’s reaction function) unquestionably implies the readiness of the economy to handle a rate increase, the dovish interpretation of selected data may keep the Fed on hold longer than we would anticipate, particularly with a benign inflation environment and subdued wage growth to date.’
Rieder is a co-manager on the BGF Fixed Income Global Opportunities fund. The fund has returned 21.8% in US dollar terms over the three years to the end of June 2015, which compares to a rise of 18.35% by its Citywire-assigned benchmark, the Barclays Global Aggregate USD TR, over the same period.