Don’t look to the Fed as a bellwether for policy rate decisions globally: Analyst

While the US Federal Reserve will likely look to cut interest rates at least once or twice next year,  global inflation will not decrease sufficiently to encourage other central banks to follow suit, according to new analysis from US asset management giant T Rowe Price.

Ken Orchard, head of international fixed income and portfolio manager for diversified income bond strategy at T Rowe Price argues that the US’s mirroring of broader global economic trends so far this year has been more exception than norm.

Whilst observing “some narrowing in growth rates recently”, this norm – a divergence in growth and thus in monetary policy between the US and broader global economy – is expected to re-emerge at some point next year, Orchard argued.

“I would characterise what we’ve seen so far this year as more of a pause in US exceptionalism than the end of it, at least in the last few months,” he said.

“As these growth differences re-emerge, we can expect to witness more monetary policy divergence between the US and other major developed markets, such as Europe and the UK.”

In remarks to the US Congress yesterday, Fed chair Jerome Powell appeared to reinforce the case for an interest rate cut, declaring that the US economy was “no longer… overheated” with a cooling jobs market appearing to be settling back to pre-Covid pandemic levels.

Orchard notes that the most significant divergences in monetary policies are likely to occur between the US and Asia.

“The Bank of Japan, for example, has already started hiking rates and is expected to continue doing so for the next year, or possibly even longer.”

Orchard added: “When considering the implications for rates markets, it is important to differentiate what is priced in versus what will happen. Many cuts have already been priced in for Europe, the US, and other developed markets.

“Our viewpoint differs from the consensus in that we believe inflation will not decrease sufficiently to enable central banks to cut rates next year.”

He further warned investors to brace for a potential hike in interest rates to combat sticky inflation.

“Inflation tends to be relatively persistent, and there is a possibility that we might even witness higher rates and yields in the future.

“Consequently, we have kept our overall duration lower to minimise interest rate risk.”