The Fed has raised the target range for the U.S. federal funds rate for the second time this year, so the question now is when the next hike might occur.

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Despite the increased pace of hikes in 2017 compared to 2016, it could be a waiting game, says John Braive, vice-chairman of global fixed income at CIBC Asset Management, and manager of the Renaissance Canadian Bond Fund.

“We’d expect the policy rate to potentially go up one more time in the fourth quarter, but that’ll extend into 2018,” he says. “This is a very gradual tightening cycle by the Fed.”

The reason? The U.S. economy has underwhelmed in 2017.

Read: Fed will keep raising rates slowly. Here’s why

“What we’ve seen is relatively weak real numbers for the economy,” versus more positive survey-type numbers “like the ISM numbers [and] the consumer confidence numbers,” says Braive. He adds that survey numbers are probably pushed higher by survivorship bias—which involves ignoring or excluding the negative performances of markets, companies and funds, versus also measuring the performances of those that have failed or closed, when looking at historical data.

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Regardless of what soft data indicate, “the [U.S.] economy isn’t doing as well as a lot of forecasters had predicted for this year,” Braive says. “For that reason, we’ve seen the odds of a Fed increase later in the year go down quite a bit, to below 30%.” For the market to price in a rate increase, odds must be greater than 50% or 60%, he explains.

“Because we’ve seen this decline in the expectation of the Fed moving a third time this year, the yield curve has flattened,” he explains. “That’s one of the reasons the 10-year bond in the U.S. has done very well this year.”

Braive doesn’t expect the Bank of Canada to move this year, either. “We don’t believe the bank’s going to do anything with interest rates in the next 12 months,” he says. “That’s mostly because […] Canada isn’t going to do as well as the consensus.”

Read: Why the BoC sees just 1.8% growth in 2019

However, “If we’re wrong there, then we’ll have to change that view,” he adds. The Bank of Canada, which meets next on July 12, pegs 2017 GDP at 2.5% in its April 2017 monetary policy report. Recent remarks from Governor Poloz suggest the central bank is inching closer to a hike.


Europe on hold

For its part, the European Central Bank (ECB) held tight last week to its loose monetary policy, noting that “The Governing Council expects the key ECB interest rates to remain at their present levels for an extended period.”

The European economy is slightly stronger, says Braive, but the ECB is focused on the inflation rate, which is below target. Combine that with the ECB’s statement last week, along with media commentary, and “you’re not going to get a change in the policy of the ECB,” he says.

The central bank will “continue to buy the 60 billion or so of securities [it’s] buying every month,” he adds, which shows the bank “is supportive of the rate structure and therefore supportive of rates overall globally.”

So what can you do?

Braive’s response to the central banks’ actions — or lack thereof — is to increase yield in the portfolio by moving from shorter-duration corporates to mid- and longer-duration ones. “The spread for short-term corporate bonds is quite tight compared to the spread for five- or seven-year corporate bonds or 10-year corporate bonds,” he says.

As a result, “We have been selling 2018-, 2019-type securities, moving a little out the curve in the [20]22s and [20]23s for some fairly substantial pickups in yield. And we will continue to do that in the portfolio and improve the overall yield.”


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Fed’s next move?

As of June 14—prior to the Fed’s afternoon rate hike—CME Group’s FedWatch Tool estimated about a 33% probability for the target range of the federal funds rate to be hiked to 125 to 150 basis points on December 13, 2017–that compares to nearly a 60% chance that the Fed will stand pat at 100 to 125 basis points at that point.

After yesterday’s hike, the probability that the Fed would hike in December rose above 40%. Alternatively, the tool found there was a 50% chance that the central bank would make no move at that time, versus about an 8% chance the target range would move higher than 125 to 150 basis points.