'Nothing to fear from US interest rate hike'

Industry insider says US Federal Reserve's interest rate increase should not worry investors

'Nothing to fear from US interest rate hike'
The US Federal Reserve’s expected decision to raise its interest rate yesterday was the right move, according to an industry insider.

Brian D’Costa, partner at Algonquin Capital Corporation, said the announcement contained “no fireworks” and that the hike should not have a huge impact on investors’ returns.

The Fed increased rates by 0.25% to a target range of 1.25% to 1.5% and maintained its prediction of three further hikes in 2018. It’s a move D’Costa said should reassure investors that rates, while rising, will “not do so particularly quickly”.

He said: “The real issue here is that while the US economy is at full employment, inflationary pressures remain really benign. As long as that situation persists, and there is really no reason why it can’t, interest rates aren’t going very high.

“Even Janet Yellen (Chair of the Federal Reserve) in the press conference talked about the neutral rate, that’s the rate the Fed says is neither stimulative nor restrictive. They never give you a number but she just said it is likely that the neutral rate is lower now than it would have been in the past.

“It will likely move a little higher but it is still going to be lower than historically. So I look at that and think maybe the Fed funds rate goes to 3% over the next two or three years if everything works out well. So when you look at the longer part of the yield curve, can your yields in the US get to 2.35% give or take? Maybe they are going to get to 3% but it is going to take a long time unless we get significant improvement to inflation numbers.”

He added: “It was the right move, absolutely. The reason they are doing it is because they recognise they don’t need to be so stimulative in the economy today, so they are just trying to make sure that they don’t allow imbalances to be created because of ultra-low interest rates. I think it is fully warranted.”

D’Costa believes that the Bank of Canada will follow suit and said that investors should be prepared for interest-rate hikes next year, probably starting in the spring.

“There is some chance of January if GDP and employment is strong, but inflation numbers are not particularly high,” he said.

He added: “People who are over-levered and borrowing, sure borrowing rates are going to go up a little bit, I think that’s a bigger concern. But I don’t think investors at this point need to be tremendously worried about central banks upsetting the capital markets.”