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JP Morgan calls for US rate rise

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The question of whether the US Federal Reserve will start raising interest rates this year has gripped investors, and sent markets soaring or sinking on even the slightest hint of a change in the timetable.

Earlier this year, it seemed interest rate “lift off” would happen in September.

But that deadline came and went, with the Fed worried that higher rates would snuff out America’s fragile economic recovery.

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However, a new study by JP Morgan Asset Management argues that in this era of ultra-cheap money the opposite applies, and a rate rise now would actually stimulate the US economy.

“These low interest rates again are sending the wrong signal about where the economy is, the strength of the economy, and what it actually needs,” said JP Morgan Asset Management’s global market strategist Kerry Craig.

The Fed’s Open Market Committee meets this week and again in December, but investors are now betting that the first US rate rise since 2006 will not happen until the middle of 2016.

One of the key concerns about lifting interest rates is that it would also raise the US dollar and make the American economy less competitive.

But JP Morgan Asset Management argues that higher interest rates have already been priced into the exchange rate, and the US dollar could fall once “lift off” occurs, as it has in previous tightening cycles.

JP Morgan graphic 3

JP Morgan: argues that holding off on a rate rise is hurting confidence.

The paper also says a rate rise would have a positive impact on Americans’ incomes, because 90 per cent of mortgages are fixed, and there is more money in bank deposits than there are in variable home loans.

But Mr Craig says perhaps the biggest boost from a rate rise could come from the confidence it generates.

“The confidence signal that you get from the Fed actually raising rates can have a dramatic impact,” he said.

“What we have seen when they have constantly delayed that rate hike, it has a very negative impact on confidence. Because it becomes a question for markets and investors – what does the Fed know that I don’t?”

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The JP Morgan report also says the Fed risks repeating the mistakes of Japan, which has “wallowed for 20 years with zero interest rates without showing the slightest evidence of ‘stimulated’ demand”.

The paper says low interest rates are now acting as a “sedative”, rather than a “stimulant”, in the US economy.

However, the Federal Reserve is also worried about its impact on emerging markets, like Indonesia, Thailand and Malaysia.

A rate rise in the US would potentially see billions of dollars that have been borrowed at low rates flow out of those countries and back into the US, hurting growth in both the emerging markets and the US.

“The data in the US is already starting to slow,” said Angus Coote, an executive director at Jamieson Coote Bonds.

“So if they do hike and the market isn’t expecting it, the US dollar screams, we have emerging market problems.

“They talked about China 16 times in the last meeting – that is unheard of.”

Mr Coote believes the Federal Reserve would like to raise rates this year, but will probably put it off until next June.

He says the Fed has become too beholden to markets, which rally on bad news because it reduces the chance of a rate hike.

“We have a weak data print on the September payrolls, and perversely the S&P (share index) rallies 6 per cent in 7 days

“The market is addicted to stimulus and it is very hard for the Fed to wean themselves off it.”

-ABC

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