The Federal Reserve’s latest decision to stall on raising interest rates has further increased fears it has missed the best window of opportunity, bond veteran Rick Rieder has said.
In an investor update, the Citywire AA-rated manager and chief investment officer for fundamental fixed income said the latest FOMC decision was not a surprise but perhaps a mistake.
Rieder also referenced the inclusion of the phrase ‘global economic and financial developments’ in policy considerations at the September meeting, where they also held rates, as potentially halting future action.
‘Without question, some of the data in the US has come in weaker since the last Fed meeting, which reinforces our long-held view that the Fed has risked missing a window of opportunity; particularly by overly focusing not only the currently low levels of inflation, but also the aforementioned on international developments,’ he said.
While global conditions have stabilised since the correction seen at the end of August, Rieder said the slowing labour markets and soft export activity that has emerged domestically since the September meeting cannot be ignored.
‘Where, then, does this leave the prospects for rate normalization? We think this statement leaves open the door for an initial rate hike at the December meeting, although should data remain softer in the year’s last quarter, clearly the hike could be pushed off until early-2016.
‘At this point, we would place a rough probability of just over 50% for an initial rate hike at the Fed’s December meeting,’ he added.
Elsewhere, Ken Taubes, head of investments US at Pioneer Investments, said the Federal Reserve had deliberately made December the ‘live option’ for considering raising rates in the eyes of market participants.
‘Overall, the statement was a little more hawkish than people were expecting. The Fed has a little more confidence in the economy than the current market view.
‘We may see more near-term volatility as the market prices in the Fed’s potential rate increase. But, the Fed is not going tighten so much to slow the economy,’ he said.
Taubes said this latest policy announcement justified his reluctance to enter the shorter-end of the US treasury market. This was as five-year notes sold off aggressively compared with 30-year paper in the wake of the latest minutes being released.