It’s likely the Federal Reserve will raise rates in December, says Tony Crescenzi, executive VP and market strategist at PIMCO.
Crescenzi spoke about how to invest in today’s neutral market at the CFA’s 2015 Institutional Management Forum.
He says the Fed has been postponing raising rates, and the extra time has allowed them to build up the economic leeway to increase rates three times in a row.
For more tips from Crescenzi, see our live tweets below. And, follow @advisorca for more news and event coverage.
Live tweets from Institutional Management Forum
Next at @CFAToronto’s institutional #investor conference is PIMCO EVP and PM Tony Crescenzi.
PIMCO’s investment thesis is we’ll have low interest and growth rates for the next 10 years, says Crescenzi. And, PIMCO calculates the neutral interest rate at 2%, and the real rate at zero.
European investors sense ECB is nowhere near raising interest rates. There’s a current account surplus of hundreds of millions as money pours into European investments, says Crescenzi.
PIMCO expects Fed to raise rates in December, says Crescenzi. In Sept, eight out of 12 Fed banks asked for a rate raise. So, only four #FOMC members want to wait until 2016 to raise rates. #investing @PIMCO
Further, no #Fed member who has said they want to raise rates this year has later changed their mind, says Crescenzi.
Fed is projecting payroll growth will slow over the next year. Drop in unemployment rate will slow, says Crescenzi. But he points out that as the U.S. economy reaches full employment, the rise in employment will slow.
So that’s why slowing job numbers are still an acceptable condition for a December rate hike, says Crescenzi. In fact, starting in December, Crescenzi’s calling for three consecutive #Fed hikes , and he suggests they’ll have a declining impact on yields as time goes on.
Fed holds $1.7 trillion in American mortgages, says Crescenzi. Right now payments are reinvested, but next year he says that’ll be tapered.
Finally, there are five reasons the #Fed thinks the neutral level of its policy rate may have fallen. These are: 1) higher precautionary savings by U.S. households; 2) Higher global savings; 3) demographics; 4) slower growth in potential output; and 5) Restrained credit growth.