INSIGHTS

MAYBE A FED RATE HIKE IS JUST WHAT WE NEED?

Mark Lister, 14 September 2016

The US Federal Reserve meets next week and based on what we’ve heard lately from some of the higher profile Fed members, it’s definitely a “live” meeting. That means there’s a genuine chance of interest rates going up, for just the second time in a decade.

It would still be somewhat of a surprise, with market pricing currently implying just a 30 per cent probability of a move. This rises to about 60 per cent for the December meeting, partly because the US election will be out of the way by then.

Despite the modest odds, I’m hoping they do make a move this month. Here’s why.

The US economy can handle it. Sure, there are some mixed signals, but the US economy is still in much better shape than many others around the world, certainly Japan and Europe. The labour market is solid, consumers are going fine and the banking sector is strong. A small rise from the current 0.4 per cent isn’t going to send them into recession, or anything close to it.

Secondly, we’ve got to start weaning ourselves off the medication sometime. Everyone’s become dangerously reliant on these record low interest rates, and they’re causing all sorts of distortions and signs of asset bubbles. The sooner we about face and start the journey back to normality the better.

A Fed rate hike or two would give our Reserve Bank a break, and boy do they need it. Our economy is cranking, house prices are well into bubble territory in places and we’re about to post a fantastic growth rate of about 3.5 per cent.

Our only weakness has been the beleaguered dairy sector, but with prices up 30 per cent in two months things certainly turned a corner. Why on earth would you want a record low OCR against that backdrop?

The currency, that’s why. Unfortunately the NZ dollar isn’t going any way but up while we look stronger on every economic measure, and while we offer a much higher interest rate.

About the only thing that’ll take the wind out of the currency is for some of our larger peers to start moving away from ultra-loose monetary policy. Don’t expect anything from Japan or Europe on that front, but the US would be a good start.

Finally, we need a correction to create a few buying opportunities. The NZX50 is up 30 per cent in the past 12 months and more than 120 per cent in the last five years. That even makes the 90 per cent gain from the mighty Auckland housing market look a little ordinary.

Great for those who’ve been invested for a while and have made a lot of money, but not at all helpful for new investors trying to get a foothold in the market. A US rate hike would surely see some temporary panic set in to fickle financial markets, but that’s by no means a bad thing right now.

So there you go, it’s pretty clear to me what needs to happen. Over to you Janet.