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Fed holds interest rates: four banking and asset experts weigh in

The US Federal Reserve announced its decision to maintain the federal funds rate between 0% and 0.25%.

The US Federal Reserve announced its decision to maintain the federal funds rate between 0% and 0.25%.

The committee also agreed to increase holdings of Treasury securities and agency residential and commercial mortgage-backed securities.

We asked private banks and asset managers what this means for investments. Here are their views. 

 

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The US Federal Reserve announced its decision to maintain the federal funds rate between 0% and 0.25%.

The committee also agreed to increase holdings of Treasury securities and agency residential and commercial mortgage-backed securities.

We asked private banks and asset managers what this means for investments. Here are their views. 

 

Bank of Singapore

The Fed’s most recent outlook is fuelling a falling dollar and the record gold prices, said chief economist Mansoor Mohi-uddin. 

The central bank’s chairman Jerome Powell had said that the Fed’s year-long review of its monetary policy would conclude in the near future. Powell also mentioned that financial markets understood the Fed’s intentions to support the economy.

‘This is important as the central bank chief is effectively endorsing the current trends of the market,’ Mohi-uddin said.

It means the falling US dollar, declining real interest rates, rising inflation expectations and record levels of gold and stock prices should continue, as the Fed is likely to remain dovish and ease its monetary policy further.

‘The central bank is likely to commit to keeping fed funds at 0.00% to 0.25% until inflation returns to the Fed’s 2% target,’ he said, adding that the review should finalise at the next meeting in September.

Meanwhile, a shift to ‘average inflation targeting’ could signal interest rates remaining at its current levels up to 2025. ‘This would keep the US dollar in a clear downtrend, to the benefit of risk assets,’ Mohi-uddin said.

JP Morgan Asset Management

The Fed’s latest announcements are largely within expectations, pinning policy views to the pandemic development.

‘This is sensible given governments around the world are still trying to find an optimal point between containing the outbreak and allowing their economies to operate,’ said Tai Hui, global market strategist.

The continued pace of Covid-19 infections in US, coupled with the rebound in new cases globally, will mean that recovery momentum could slow down.

However, the central bank has enough firepower to support the economy as things stand, Hui said: ‘The need to take more drastic action, such as negative rates, is low for now.’

For now, the Fed’s commitment to keeping yields low have depressed the dollar which will benefit emerging markets and Asian assets.

To that end, JP Morgan is recommending a closer look at Asian equities particularly those with a strong structural growth theme in China, Asean and South Asia.

‘This should offer additional diversification opportunities to a balanced equity and bond portfolio,’ Hui said.

DBS Bank

For the Singapore bank, the high infection rates in the US mean that in the immediate term, fiscal cliff looms.

‘Monetary policy is thus left to a supportive role to create as loose an environment as possible for all segments of the economy,’ the bank’s group research team said.

In the current climate, the bank prefers treasury inflation-protected securities over US treasuries for balance, as breakevens are still on the low side.

On the other hand, low realised and implied volatility in US treasuries are creating a supportive environment for carry.

‘The fiscal cliff and rising China-US tensions notwithstanding, we think that Asia rates are likely to be well-supported in the next few months,’ the bank said. 

DBS prefers the Indonesian government bonds in the high yielding sector. In the lower-yielding segment, it expects Singapore government securities around the fiver-year tenor to do well in the face of the weakening US dollar.

Principal Global Investors

The lack of additional insights beyond the expected policy moves overnight manifested with investor sentiment, resulting in a muted bond market reaction after the meeting.

‘If anything, there was more mention of fiscal policy than monetary policy in Powell’s speech,’ said Seema Shah, chief strategist.

The economic recovery is also at stake if the US Congress is unable to come together to agree on a new fiscal stimulus package before the end of summer, Shah said.

‘One of the key factors that enabled consumer spending and jobs to rebound so sharply is May and June was the $3tn in fiscal stimulus,’ she added.

With the special unemployment benefits set to expire at the end of the week, the market rebound could be facing a premature stop.

‘With rates already so low, monetary policy is becoming less effective at stimulating the economy,’ Shah said. While it could potentially soften the downturn, the Fed will not be able to prevent it ultimately, Shah said. 

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