“The odds of a big negative surprise affecting the markets out of the Fed over the next 12 months just aren’t there anymore,” McDonald said in an interview in Sydney. “It’s well understood and is well priced into the market.”
Northern Trust’s sanguine stance is at odds with the likes of Pacific Investment Management Co., who warned this month that investors are overlooking the possibility that the Fed turns hawkish and tightens policy too fast, choking off growth. The central bank has long said it will be patient about getting monetary policy back to normal, not wishing to stifle the tepid recovery. Mohamed El-Erian, Allianz SE’s chief economic adviser, said Wednesday that markets are underestimating the chance of a rate hike as soon as next month.
You may also like to watch this
Futures indicate traders aren’t nearly that confident, reflecting about a 34 percent probability that officials boost rates a quarter-point March 15, data compiled by Bloomberg show. It would be the third increase since December 2015, and traders are reluctant to price in the next hike in part because wage growth has slowed.
While minutes released Wednesday from the latest meeting showed many Fed officials saw a rate increase “fairly soon” if the economy was on track, they also expressed concern over potential headwinds from dollar strength and the uncertainty surrounding the outlook for fiscal stimulus. And Federal Reserve Bank of Cleveland President Loretta Mester said Wednesday before the minutes that policy makers don’t want to surprise the markets.
“They are not going to raise rates too rapidly,” McDonald said. “We think two hikes over the next year.”