The US Federal Reserve is likely to drag out its interest rate increases over three years, says Magellan chief executive Hamish Douglass, meaning the US economy is unlikely to come to a "grinding halt" as rates increase.
Speaking at Magellan Asset Management's adviser roadshow in Sydney yesterday, the firm's chief executive, CIO and lead portfolio manager Hamish Douglass said the likelihood of a bond market rout is unlikely.
Mr Douglass compared the current US interest rate cycle with the rate hikes that began in 1994.
"[In 1994, the Fed] increased the overnight cash rate. In February 1994 it stood at three per cent, and over a period of seven rate increases they increased it to six per cent," he said.
Contrary to fears at the time, the US economy did not "fall off a cliff" as a result, he said.
"They started at 25 basis points at the time, and after they started tightening monetary policy, the US economy actually accelerated – and unemployment continued to fall.
"What they then did was take the rate increase from 25 basis points to 50 basis points. Did the economy stop? No, it kept going – and they ended it with a 75 basis points hike," he said.
Mr Douglass said it is "very unlikely" that the US economy will come to a halt when the Federal Reserve starts tightening monetary policy.
"I would put a wager on it – and I hate betting – that the US economy will actually pick up speed after they start tightening interest rates in the US. And the reason I say that is there is US$10 trillion of deposits in America that for seven years have been bearing no interest," he said.
The coming rate increases in the US are likely to be "very gradual", he added.
"I'm anticipating they're going to do it over three years, not over 18 months like they did in 1994, which probably means it's unlikely we're going to get the 1994 bond market rout scenario," he said.
"We're not going to have plummeting bond prices as this happens. It's probably going to be more like a frog in water where you gradually turn up the heat.
"The Fed's going to boil us slowly here. But you have to notice when the temperature's changing, and we're just starting to see the temperature change and affecting the periphery of the risk assets in the world with dramatic movements in prices," Mr Douglass said.
SUBSCRIBE TO THE IFA DAILY BULLETIN
15 Dec 2017AIW Dealer Services enters EUBy Staff Reporter
15 Dec 2017New CEO appointed at Centrepoint AllianceBy Staff Reporter
15 Dec 2017FASEA education pathways provide certainty: O’DwyerBy Killian Plastow
14 Dec 2017AUSTRAC adds to list of CBA allegationsBy Killian Plastow
15 Dec 2017Get ‘independent financial advice’: Joe HockeyBy Aleks Vickovich
14 Dec 2017‘Forward-thinking’ advisers drive mFunds growthBy Aleks Vickovich
- view all