Transcript of Podcast:
Hi I am Arjun Parthasarathy speaking and this podcast is on “Fed Rate Hikes and your Investment Portfolio ”
The Fed Chair Janet Yellen has sounded out a period of rate hikes to normalise interest rates and keep inflation expectations stable on the back of strong labour markets. US unemployment rate at 4.7% is keeping the economy at an almost full employment level and as the economy grows, tight labour markets will drive up wages leading to wage push inflation.
Fed will hike rates gradually from current levels of .5% to 0.75% range over the next couple of years in order to prevent overheating of the economy. Given that the incoming Trump administration is keen on a fiscal boost to the economy, the chances of faster than expected economic growth are high. The Dow, S&P 500 and Nasdaq composite indices are trading at record highs reflecting the optimism in the markets on the strength of the US economy.
The Fed hiking rates affects your investments as global capital flows determine the sentiments and strength of markets all over the world. How should you structure your portfolio to factor in rate hikes by the Fed.
Fed rate hikes, when it is broken down, is not at all negative for markets. The reason is that the Fed had brought down interest rates to zero percent post 2008 financial crisis and is only starting to normalise rates. Fed is not tightening policy to cool down an overheated economy, that scenario, if at all it happens. is still a few years ahead.
Fed is hiking rates only because it believes that the US economy is strong enough to withstand rate hikes. A strong US economy is good for global growth and will help economies across the world including India.
Equity markets will continue to do well as long as the Fed hikes rates steadily and gradually. Volatility will be high only if the Fed hikes rates much faster than expected, which at this point of time is not the case. The Fed will be watchful of overdoing rate hikes given that the world economy is still not fully out of the woods with China, Eurozone and other emerging economies still seeing growth well below levels seen pre 2008.
Global sovereign bond yields would give up their safe haven premiums and will correct upwards. However yields will not spike as inflation and growth expectations globally are still down though better than what they were a couple of years ago. Emerging economies bond yields would move on domestic factors of fiscal deficit, economic growth and inflation.
Commodity markets will benefit from improved growth expectations globally but are not likely to go back to peaks seen pre 2008 financial crisis as global demand on the whole is still not robust.
The expected impact of Fed rate hikes on equity, bond and commodity markets should guide your investment portfolio over the next few years.
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