The minutes showed that barring ‘unanticipated shocks’, rates would rise in December for the first time since 2006. However, not all members agreed that rate rises were desirable, with some questioning whether the US economy could continue to grow in the face of tighter monetary policy.
In a break with history, equity markets responded positively to the prospect of a rate rise. Josh Mahony, market analyst at IG index said: “Global markets trended counter to the monetary policy implications, with a rally in indices and a fall in the US dollar…. The FOMC struck a particularly hawkish tone in the minutes released yesterday, providing markets with a strong degree of certainty that we will see a hike in December. The meeting took place prior to this month’s bumper jobs report, which highlights that, barring an absolute shocker in December, Janet Yellen and co can achieve the 2015 hike they seek.”
Fund managers continue to believe that rate rises, if they come, will be moderate. Ben Russon, portfolio manager, UK Equity, Franklin Templeton Fund Management, said: “When the US Federal Reserve (Fed) does start raising raise rates…we think it would likely continue to ram home the message that any further rate hikes in the United States will probably be very gentle.
“Ultimately, we expect the peak of the next rate cycle to be far lower than anything we have seen in recent history. What this means is that even if we do see interest rates rise in the United States and/or the United Kingdom—possibly before the end of this year—it doesn’t necessarily mean equity investors should panic, because we think it is something that can be absorbed.”
