The Federal Reserve is in no position to push through a series of aggressive rate hikes, with the US central bank unlikely to end the current era of ‘lower for longer’ any time soon, Legg Mason subsidiary Western Asset Management’s Ken Leech has said.
Leech, chief investment officer at Western Asset and lead manager of the $4.3bn Legg Mason Western Asset Macro Opportunities Bond Fund, said while some predict the Fed will raise interest rates and curtail support to the markets, he expects the existing monetary framework to remain largely unchanged.
“We strongly resist the notion that we are going to have a meaningful monetary regime change in any imminent way,” he said.
“The Federal Reserve made a dovish pivot in the spring, and that was key to underpinning confidence in financial markets and the global economy. But we just do not see the Fed accelerating this process meaningfully.”
The Fed raised rates from record lows at the end of 2015, but has thus far held back from any additional tightening.
It initially signalled this was because of risks to the economic outlook, but more recently it has pointed to persistently weak inflation data as the reason it has not tightened further.
Leech said while the Fed would like to inch up interest rates slowly if conditions allow, he said challenges to both the growth rate in the US and from low inflation globally meant its scope to do so was limited.
“The US growth rate is unlikely to move meaningfully to the upside because, while the US consumer is fine and carrying the load, manufacturing is unbelievably in the doldrums,” he said.
“Meanwhile, we expect to see US and global inflation remaining very subdued, and that means central banks will continue to be supportive. The market is starting to question that, but we continue to believe that support from central banks – including the Fed – will stay in place.”