According to Western Asset chief investment officer Ken Leech, the Federal Reserve’s upbeat outlook about growth, which seems to be shared by the bond market, may result in further volatility should a rate hike be implemented ahead of the market being ready.
“We view optimism about US growth as a bit overdone… we expect [it] to slow slightly next year with inflation remaining moderate,” he says.
“Global monetary policy will continue to play a major role in the recovery… We expect more volatility such as that we saw this year should central banks misjudge the market or mishandle communication regarding policy moves.”
Global investment company Legg Mason Investment says the real pace of economic growth is likely to dictate the movements of interest rates in 2019.
Although the 5-year, 5-year Forward Rate of the US Treasury mirrors such positive sentiment, suggesting a rate scenario significantly higher than the Fed’s current estimate of 3.1 per cent in 2019, investment managers say this might be reflective of optimistic bias inspired by strong US growth this year.
Francis Scotland, director of global macro research at Brandywine Global, says there are reasons to believe that growth could be more moderate as fiscal stimulus dwindles and rate hikes begin to sting.
“[T]he Trump tax cutting agenda has complicated the issue [of rate normalization] by rocketing American GDP growth higher, which could easily bias/pressure the Fed into thinking a rapid normalization is appropriate,” he says.
“But there are a host of reasons for believing that normalization will play out over a very long time frame.”