US rates – raise, hold or bust?

Recent volatility has been driven by Greece-related events, but we expect the focus will soon shift towards expectations related to the US Federal Reserve (Fed) and whether they will begin their interest rate hiking cycle in September.

We note US economic data is continuing to strengthen as we head into Q3, with jobs, wages and inflation all showing positive signs. Based on the strength of the labour market and our expectation of rising core inflation in the second half of the year, we believe the Federal Reserve will hike short-term interest rates by 25-50 basis points between its September and December 2015 meetings. At present, the Fed funds futures market is pricing in less than a 50% probability of a September rate hike and about a 38% probability of two rate hikes in 2015.

In the short-term we expect this to create some volatility and distortions in asset classes such as credit and emerging markets debt and we look to maintain headroom to take advantage of opportunities in this space.

Raman Srivastava – Standish, a BNY Mellon company

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