As the the end of the year nears, MFS Investment Management looked back on 2014 and looked forward to 2015 – and the debatable question of when the Federal Reserve will choose to raise interest rates.
“We believe the economy is in a condition that will allow the Fed to begin moving from this zero-interest rate policy environment, and that’s what we expect them to do,” said Bill Adams, director of fixed income and portfolio manager at MFS, during a media briefing Tuesday afternoon in New York. He added, “They have the window of opportunity to do this now without upsetting the long end of the curve.”
MFS joins others’ speculation that the Fed will move to raise rates in the summer. Wall Street’s biggest banks also believe the Federal Reserve will raise interest rates by June, according to a Reuters poll. Meanwhile, just last week, Voya Investment Management experts predicted “a first-quarter 2016 tightening, earliest December 2015” during a media briefing.
“We believe the Fed will and should move in June,” Adams said. Adding, “We believe the economy is in a condition that will allow the Fed to begin moving from this zero-interest rate policy environment and that’s what we expect them to do.”
Adams looked at what he described as the “three core measures” that the Fed typically has under consideration when it begins an interest rate cycle.
These measures are wage growth, as reflected by average hourly earnings; core CPI, the consumer price index excluding energy and food prices; and the unemployment rate.
Currently, data shows wages at 2.2%, core CPI at 1.7% and unemployment at 5.8%.
Adams then compared these figures to the beginning of three previous Fed hiking cycles — in 1994, 1999 and 2004.
“All three metrics today are at least comparable to what they looked like in ’94, in ’99, and again in 2004,” he said. “So the macro backdrop is supportive of the Fed starting this policy, and that’s what we think is important here.”
In February 1994, wages stood at 2.8%, core CPI at 2.8% and unemployment at 6.6%. In June 1999, wages stood at 3.7%, core CPI at 2.1% and unemployment at 4.3%. And in June 2004, wages stood at 2.0%, core CPI at 1.9% and unemployment at 5.5%.
It’s these key economic conditions that have Adams and MFS supporting a gradual Fed tightening.
“We’re not talking about a violent upward move in Fed funds, we’re not talking about quick unexpected moves in Fed funds, but we are talking about a normalization on the front end of the curve — away from the zero interest rate policy that we’re currently dealing with,” Adams said.
If the rates do start to rise mid-year next year, Adams predicts slow movement — maybe just 75 or 100 basis points by the end of the year, he said.
“But importantly, it’s off of zero and then the Fed can take a step back and see exactly what the new interest rate policies are doing from a macro point of view,” he said.
— Related on ThinkAdvisor: