Investors’ projections for future U.S. interest rate hikes are too low and could become a source of volatility in bond markets, according to the chief economists for Fitch Ratings reported on Tuesday (9/12).
While Fed fund futures prices indicate investors are expecting U.S. interest rates will remain low for the near future, Brian Coulton, Fitch’s chief economist is anticipating the Fed to hike rates to 3.5% by 2020.
“I think there is maybe too much confidence that the Fed is not really going to do too much more on interest rates, that we’ll have one or two more rate hikes and that’s it,” Coulton reported on the sidelines of Fitch’s Global Sovereign Conference in New York, adding that the projection was “more of a personal view.”
Market participants are predicting, “just one or two interest rate increases a year” from the Federal Reserve, he added, despite the Fed’s stated expectation of seeing long-run interest rates at 3.0 percent.
“When the Fed says they’re going to engage in a gradual rate of interest rate increases, they mean three or four rate hikes every year and we think that’s what they’re going to do,” Coulton stated. “We think that you should take them at their word and it may even be a little faster than that.”
The market’s expectations could create volatility in fixed-income markets, Coulton added.
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Fed fund futures prices display that investors expect just one more rate hike by August 2018. The Fed raised rates in December 2015 for the first time in ten years and has hiked rates three times since to a range of 1.00 – 1.25 percent. However the U.S. central bank had predicted four rate increases for 2016 and three for 2017, which would have put overnight interest rates at a range of 1.75 – 2.00 percent.
Coulton adds he expects the Fed to pick up the pace of rate hikes even if U.S. inflation remains low.
“We think they’re going to be … getting more worried about some of the negative consequences of (quantitative easing), the fact that it encourages risk taking and may create some issues for the banks,” he concluded.