'It's way too soon to panic about Fed rate hikes'
Friday's strong jobs re port gave the Federal Reserve the final clearance it needs to raise interest rates at its March meeting. The economy added 235,000 jobs, beating the forecast for 200,000 jobs. The Fed's move is for all the right reasons, amid some rumbles of higher borrowing costs and taking away the stock market's proverbial punch bowl, according to Keith Wade , chief economist and strategist at Schroders , which has $487 billion in assets under management. Business Insider spoke to Wade about what he's expecting from the Fed next week.
There's this idea of higher rates taking the punch bowl away from markets. In the stock market, things are overvalued. Is that a risk, the idea that the Fed could take the punch bowl away at time when there are already concerns about valuations?
It is a concern and certainly, a lot of the work we've done on interest rate cycles and the market shows that once the Fed starts [hiking,] investors start being a bit more wary about valuation. This period of tightening is very much related, I think, to an acknowledgment that the economy is improving. The time to worry is really when tightening is to try and bring down inflation. From what we're looking at, we don't see a big deterioration in inflation expectations. So, the time for the market to worry will be maybe later on when we do see wages accelerate a bit more.That will be more concerning for the market because that would be a different type of tightening. It will be much more like this is not just a benign recognising that things are getting better, this is a need to slow the economy to bring inflation under control and cool things down.
What kind of guidance are you looking out for from the Fed?
The most interesting quote from Yellen last Friday was about the pace of tightening. If you go with the dots, you could get a couple of more rate rises after next Wednesday. Obviously, there's a lot of uncertainty at the moment about fiscal policy. Given where the economy is at the moment, you can probably justify a little bit more in terms of rate increases. The economy is getting back to normal, and rates aren't going to go up rapidly or to a very high level. They won't say much more beyond that because they're still waiting on the fiscal side.
There's this idea of higher rates taking the punch bowl away from markets. In the stock market, things are overvalued. Is that a risk, the idea that the Fed could take the punch bowl away at time when there are already concerns about valuations?
It is a concern and certainly, a lot of the work we've done on interest rate cycles and the market shows that once the Fed starts [hiking,] investors start being a bit more wary about valuation. This period of tightening is very much related, I think, to an acknowledgment that the economy is improving. The time to worry is really when tightening is to try and bring down inflation. From what we're looking at, we don't see a big deterioration in inflation expectations. So, the time for the market to worry will be maybe later on when we do see wages accelerate a bit more.That will be more concerning for the market because that would be a different type of tightening. It will be much more like this is not just a benign recognising that things are getting better, this is a need to slow the economy to bring inflation under control and cool things down.
What kind of guidance are you looking out for from the Fed?
The most interesting quote from Yellen last Friday was about the pace of tightening. If you go with the dots, you could get a couple of more rate rises after next Wednesday. Obviously, there's a lot of uncertainty at the moment about fiscal policy. Given where the economy is at the moment, you can probably justify a little bit more in terms of rate increases. The economy is getting back to normal, and rates aren't going to go up rapidly or to a very high level. They won't say much more beyond that because they're still waiting on the fiscal side.
