The Federal Reserve's toned-down rhetoric on Wednesday regarding when and how it plans to hike interest rates over the next several months was applauded as prudent and necessary by Robert Tipp, chief investment strategist at Prudential Fixed Income.
“The Fed did an excellent job yesterday of trying to thread the needle,” said Mr. Tipp, as part of his quarterly outlook for the fixed-income markets.
“The Fed believes they should be raising rates, and they don't need to do it quickly, but they want to get it done,” he added.
Citing the market volatility that has kicked into high gear since the start of the year, Mr. Tipp credited the Fed with
delivering a message that signals a more deliberate, yet virtually certain commitment to pushing the Fed rate to slightly above 1% by the end of the year.
The Fed moved rates off the zero mark last month with a hike of 25 basis points, that represented the first rate hike in nearly a decade. Rates were cut to zero in the wake of the 2008 financial crisis, which was followed by
three rounds of quantitative easing, adding nearly $5 trillion to the Fed's balance sheet.
LABOR MARKET
Mr. Tipp believes the Fed wants to avoid having to resort to another round of quantitative easing, or even worse, introducing negative interest rates, as several European economies are now experiencing.
“The Fed is signaling they will be moving much more slowly,” he said. “They need to keep the confidence in the markets, and get the rate hikes done.”
Recognizing the absence of inflation and what he described as “slack in the labor market,” Mr. Tipp acknowledged that the Fed was sticking with its rate-hike strategy largely to provide the ability to cut rates if necessary.
“They came out of the meeting [on Wednesday afternoon] without damaging market confidence in the outlook, and at same time giving the impression that this will be a moderate, slow-moving rate hike cycle,” he said. “Clearly, what the Fed would rather do is just have rates higher to begin with so they could cut in an emergency.”
Mr. Tipp didn't say when he thinks the Fed will hike rates next, but he did say he expects the Fed rate to be at 1% by the end of the year.
