When will rates go up in the US?
Globally the financial world remains focussed on Janet Yellen, Chair of the Board of Governors of the Federal Reserve (the Fed), as she continues to suggest that the Fed will increase interest rates in the US at some stage before the end of this year. As shown below in chart 4 the market is now pricing in a much higher expectation of rates rising in December 2015.
If the US Fed does commence tightening in December we can expect to see the market volatility increase for a short period of time, before potentially moving into a more sustainable growth period. As shown in the table below in the past we have varying performance through tightening cycles, but on average it has been a positive share market with a sustainable climb in values. This table comes with the common disclaimer that past performance is not a good indicator of future performance, but while history may not repeat to often, it certain rhymes.
Chart 1 – Market’s assumed probability of a move
Table – Historical market movement vs. rising rates
Source: Bloomberg, UBS