Fed’s rate hike may be precursor to recession: Manulife strategist

The Bank of Canada has maintained its key rate, but all signs point to a hike by the Fed

Low interest rates have challenged life insurers for almost a decade now, and in Canada at least it looks like that policy will continue for quite some time yet. On Wednesday the Bank of Canada announced it would maintain a key rate of 0.5%, to the surprise of almost nobody, with many observers predicting a cut early next year. Things seem to be moving in the opposite direction in the US, however, and most experts believe the Fed will finally increase its rate in December. Philip Petursson is one such voice ­ – the chief investment strategist at Manulife Investments recently sat down with the head of Manulife Private Wealth Sam Sivarajan to discuss the issue for a video release by the firm.

“We do anticipate a Fed rate hike of 25 basis points in December at their next meeting,” said Petursson. “That will set a path for incremental rate increases in 2017.”

It has been a long time coming for the Fed – last December Janet Yellen announced that four hikes were planned throughout 2016. The conditions were prime to do believes Petursson, but the Fed were reluctant to follow through on its pledge. “The opportunity has been there for the Fed to raise rates over the past number of years, in terms of low unemployment, wages growing, the labour market being quite favourable to a rate increase,” he said.

In Sivarajan’s view, too much focus is put on the machinations of the Federal Reserve. Janet Yellen and her team are generally more reactive to the health of the wider economy, he says, rather than actually dictating how it preforms.

 “I think people are putting way too much stock into what the Fed does,” said Sivarajan. “If you look at the last 30 years, there has been five Fed tightening cycles and in all of those tightening cycles it has been because of improvements in the labour market. It’s been improvements in the underlying fundamentals and less to do with inflationary pressures and I would say that’s the exact situation we are seeing right now.”

What a hike this month will mean for the life insurance industry, and indeed the economy as a whole, is hard to decipher at this time. In the short term at least, it should be largely positive, in Sivarajan’s view.

“In four out of those five tightening cycles, I think investors should be reassured that 6–12 months after that first rate hike occurred, the markets increased,” he said. “The Fed raising rates should actually give investors confidence that the training wheels of the economy can actually be taken off.”

Petursson concurs on this point, but adds that history offers a guide on what successive rate hikes may mean. “While in the near term we do anticipate the markets will respond favourably, we need to be aware that going forward we tend to see the Fed raising rates into the next recession,” he says.  “Usually the end of that tightening cycle comes with a recession, and that’s what we might expect in the next three to four years.”

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