How long before interest rates go up?
STOCK markets remained stable following monetary policy statements in the US last night and UK today, which provide greater clarity on the outlook for interest rates.
Last night, the US Federal Reserve forecast US inflation to hit 4.2% in 2021, more than double its target rate, and gave its strongest indices yet that we may be approaching. of a new era in which the American economy will have to stand up. own two feet without extraordinary stimulus.
The latest Fed dot plots, which show policymakers’ expectations for the future direction of interest rates, indicate that there is no clear consensus among policymakers on when interest will start to increase. However, half now believe rates will need to start rising from their current 0% to 0.25% range in 2022, a year earlier than previously reported.1.
The Fed has also signaled that it could start reducing its asset purchases as soon as the end of the year if the economy continues to improve at its current rate. The Fed currently buys at least US $ 120 billion in bonds and mortgage-backed securities each month.
A reduction announcement in November or shortly thereafter had been widely anticipated. In response to the pandemic crisis, the Fed began supporting the US economy through an asset purchase program (quantitative easing) last March.
In a separate announcement today, the Bank of England confirmed that UK interest rates will remain at 0.1% and that its asset purchases will continue at their current pace. Regarding inflation, the Bank raised its forecast to 4% for the last quarter of 2021, but reiterated its view that cost pressures will not last. The Bank has given no further indication as to when interest rates may be raised.2.
Central banks certainly don’t want to upset the applecart by withdrawing stimulus and raising interest rates too soon. This could end the global economic recovery and not solve inflation, especially if, as we have seen in the UK, some consumer price hikes have been caused by bottlenecks in the economy. supply rather than by excessive consumer demand.
Benchmark 10-year government bond yields in the US and UK have remained low and below pre-pandemic levels today, at around 1.3% and 0.8% respectively. This suggests that there is no fear that inflation or interest rates may soar.3.
A future environment of positive economic growth and gradual rise in interest rates continues to favor equities over bonds. The Fed’s median forecast for US interest rates is now 1.0% for 2023 and 1.8% for 2024, which would represent a more modest tightening from previous cycles where rates had were raised by an average of 0.25% each quarter.4.
With the change in the air in the United States, equity markets are expected to continue showing bouts of volatility over the next few months, implying that investors may do well to maintain diversified exposures spanning a variety of asset classes. assets and geographic areas. The latest investment insights are meant to help point you in the right direction.
1 Federal Reserve Bank, 09.22.21
2 Bank of England, 23.09.21
3 Bloomberg, 23.09.21
4 Federal Reserve Bank, 09.22.21