Looking to 2017, Eric Lonergan, macro fund manager at M&G, believes the Fed should welcome in the new administration’s pro-cyclical policy intentions.
“A dose of Trumpian animal spirits may be precisely what is required to shift the steady growth of the US economy up a notch or two, allowing the Fed to get rates up significantly away from zero and closer to 3-4%,” he said.
“It is worth remembering that, in the same way that ever lower rates at a certain point proved counter-productive, a rise in interest rates may prove less of a constraint.
“Banks may well ease lending conditions in response to higher margins, and if corporate optimism feeds through to a tighter labour market and wage increases, final demand may prove as immune to higher interest rates as it did to ever lower global policy rates in recent years.”
However, GAM’s chief economist Larry Hatheway, noted the Fed’s official statement made no mention of the US fiscal expansion or economic deregulation widely anticipated following Trump’s election.
“As a consequence, should those factors materialise, the Fed may have to further lift its assessments for US growth, inflation, and the likely path of interest rates,” he said.
“Yesterday’s decision reinforces market moves underway since mid-year and at an accelerated pace since the US election.
“Bond yields appear poised to move higher, with further rotation likely from yield-sensitive stocks to those that generally benefit from steeper yield curves (financials) and stronger growth (cyclicals, value).”