Muted response to Fed move

Global monetary policy is likely to be supportive for investors in international equity markets for some time, including in New Zealand and Australia, commentators say.

Friday, December 18th 2015, 5:59AM

by Susan Edmunds

The United States’ Federal Reserve yesterday increased its interest rates for the first time since 2006.

The immediate response was muted because the increase had been so well signalled. The New Zealand dollar barely responded. Equities lifted slightly.

Christian Hawkesby, of Harbour Asset Management, said the only small surprise came from the fact the Fed had not significantly lowered its future forecasts for the Fed Funds Rate, which sit around 1.4% for the end of next year, implying four more hikes to come.

But he noted that it was only reasonably confident of inflation rising to its target and there were risks it would remain below it, reducing the need for more hikes next year.

Hawkesby said the environment was still positive for equities investors.

“The Fed has finally delivered clarity, and this allows the market to move its focus back to the fundamentals. In previous tightening cycles, equities have continued to perform, in part because of the improving growth outlook. It looks some time before sharply rising inflation creates a problem for equity markets; if anything the Fed emphasised the alternative scenario of stubbornly low inflation delaying the tightening cycle.”

John Berry, of Pathfinder Asset Management, said as long as the Fed’s future increases were slow and methodical, as it had been signalled they would be, there would be no major fallout for the markets.

The Reserve Bank is hoping rising rates in the US will put pressure on the Kiwi dollar against the US, taking the heat off falling dairy prices and concerns about exports generally.

Infometrics economist Gareth Kiernan said it would probably take a sustained cycle of hiking to do that, or to have any major effect on interest rates. He said there was room for long-term bond rates to move higher if the tightening cycle was sustained.

The lack of currency response this week could have been an unpleasant surprise to the Reserve Bank, the commentators said. It might have to turn to further official cash rate reductions to hit its inflation targets.

Hawkesby said: “The Governor has been very open about wanting the Fed to finally get on with it and raise the Fed Funds rate, in the hope this would weaken the NZ dollar. As it has turned out, since the RBNZ’s ‘hawkish cut’ last week, NZ bond yields have risen 0.15% and the NZ dollar is sitting around 5% above the RBNZ’s forecasts. This makes it harder for the RBNZ to get CPI inflation back to the 2% mid-point of its target range. In our view, that raises the chances of further OCR cuts in 2016.”

Tags: interest rates investment