This year, what happens in the US is critically important to what happens in the global economy because of the intense focus on the Federal Reserve (Fed). We’ve had near-zero interest rates since the onset of the global financial crisis, and the Fed has indicated that at some point, probably this year, it will start to raise rates. In this video, Shane Oliver, Chief Economist and Head of Investment Strategy at AMP Capital, provides an update on the US economy.
A couple of critically important points for investors to remember
- When the Fed does start to raise rates, it will only be because the US economy is coming out of the danger zone that it’s been in since the global financial crisis. As the US economy gets back on track, the Fed can start to take more of the medicine away;
- Any tightening in monetary policy will be a very gradual process. There is no need to be aggressive in an environment where inflationary pressures are very low;
- Historically, there has typically been a bit of volatility and corrective activity in share markets around the time of tightening. Once the market starts to get used to the fact that the Fed is only tightening because of stronger growth, the bull market in shares should resume.
Our base case is that the US Federal Reserve will raise interest rates later this year, probably around September. When they do start to raise interest rates, the key is that it will be a very gradual process.