The US Federal Reserve (Fed) is on track to end its quantitative easing program in October. As a result, investor attention is turning towards speculation over when US interest rates will start to rise.

The story so far…

Update on QE tapering and the outlook for interest rates

On the one hand, the US economy has improved enough to allow the Fed to continue tapering its quantitative easing program throughout 2014 without causing too many dramatic disturbances in investment markets. On the other hand, it’s unclear that conditions are strong enough to warrant interest rate hikes just yet. This is something the Fed is grappling with, but the conclusion seems to be that – with inflation and wages growth at low levels and excess capacity in the labour market remaining – the Fed is unlikely to rush into raising rates.

The Fed currently states that it anticipates a ‘considerable time’ between the ending of quantitative easing and the first rate hike, with this taken to mean six months or more. With quantitative easing ending in October, we expect the first rate hike is likely to be in the June quarter of 2015.

What does this mean for investment markets?

With quantitative easing ending in the US and interest rate rises on the cards within the next 12 months, implications across each asset class vary.

Generally speaking, the end of quantitative easing and eventual US interest rate increases should be viewed by all investors as a good sign – after six years the US economic recovery is well underway and solid enough to withstand the start to more normal monetary conditions.

While uncertainty regarding the timing and magnitude of US interest rate increases is likely to keep flaring up periodically, on balance the move is a positive indicator as it signifies a brighter long-term outlook for the US economy (and therefore investors).

The fact that each assets class will be impacted in a differing way – and to a differing extent – is a timely reminder of the importance of maintaining a well-diversified portfolio.

About the Author

Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP Capital is responsible for AMP Capital's diversified investment funds. He also provides economic forecasts and analysis of key variables and issues affecting, or likely to affect, all asset markets.

Important note: While every care has been taken in the preparation of this information, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This information has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. Certain information in this website has been obtained from sources that we consider to be reliable and is based on present circumstances, market conditions and beliefs. We have not independently verified this information and cannot assure you that it is accurate or complete.