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Fed up and more rises on the way

The US Federal Reserve’s to lift interest rates, in stark contrast to the Bank of England’s cutting strategy, has not surprised industry experts.

Last week, the Fed increased rates by 0.25 per cent for the 10th consecutive time to 3.5 per cent.

F&C head of strategy Paul Niven says the market expects increases of 0.25 per cent at each of the three next meetings before the end of the year, resulting in a rate of 4.25 per cent. Niven says: “Comments from Greenspan and upward surprises to economic growth in recent months led to speculation that more aggressive tightening would come. This was not the case. The Fed has recently stated it will remove policy accommodation at a ‘pace that is likely to be measured’ – that it believes that rates are below a ‘neutral’ rate and they will be rising gradually over coming months.

“In signalling that it expects inflation to remain contained, the Fed has given equity and bond markets what they want. For equities, a bond market with stable to modestly rising yields, low inflation, and improving growth prospects provides, to some extent, the best of all worlds.”

Axa Investment Managers says the US economy is growing strongly, with unemployment falling and inflationary pressures building. Senior strategist Chris Iggo says: “There is little surprise at the Fed’s decision. Interest rates are low relative to the buoyant state of growth and we expect several more interest rate increases before chairman Greenspan steps down early next year. The rate is likely to be 4.25 per cent by year-end and could go higher next year unless the economy moves down a gear and inflationary pressures recede.”

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