Alternative Investment Industry Thinks Fed Won’t Raise Rates Until After Presidential Election

July, 2016 – With mortgage rates remaining near historic lows and the Federal Reserve having barely inched the federal funds rate up this past December when it made its first rate increase since 2006, investors have been patiently waiting for the point when interest rates finally start moving back up. Figuring out just when that will happen, however, is something analysts and economists have yet to do. The New York Hedge Fund Roundtable recently surveyed its membership about interest rates, the economic recovery and what impact, if any, Brexit is likely to have on a long-term basis.

The U.S. Economy and the Impact of Brexit was the topic of the Roundtable’s July event, where Jim O’Sullivan, the Chief U.S. Economist for research consultancy firm High Frequency Economics, shared his views on the current state of the U.S. economy, the impact of Brexit and the Bureau of Labor Statistics’ June employment report.

“From the Fed’s perspective, we’re approaching full employment. And if unemployment keeps falling we will get more upward pressure on inflation,” O’Sullivan told attendees at the Roundtable’s July event. “The point of the Fed tightening is to make financial conditions less accommodative. I think that interest rates are too low and that, ultimately, the Fed is going to have to tighten.” However, even though the U.S. is already seven years into the current recovery, which O’Sullivan notes is long by past standards, he believes the next recession is still roughly two years off.

Roundtable members believe it isn’t unemployment rates that are keeping the Fed from raising rates, but the prospect of interfering with the outcome of the presidential election. When asked when they believe the Fed will next raise interest rates, 73% of respondents said they believe the Fed will wait until the presidential election is over to avoid the possibility of harming the Democratic party.

New York Hedge Fund Roundtable members had the opportunity to weigh in on this topic both at the Roundtable’s July event as well as through an online electronic poll.

*Of the respondents to this survey, 24% were fund managers; 16% were allocators; 16% were risk management or trading; 42% were service providers;  and 2% were other industry participants.

Following are some of the other key findings of that survey:

  • When asked what they believe has the greatest potential to negatively impact the U.S. economy on a long-term basis, 66% of respondents chose the outcome of the U.S. presidential election; 30% think it is the possibility of China defaulting on its debt; and only 4% picked the Brexit.
  • Asked whether or not they believe we have seen the end of the Brexit fallout, 38% of respondents said they think it is still too early to tell whether it will have a long-term impact on the global economy; 36% think there will be more market turbulence as details begin to emerge about how Britain will unwind from the EU; and 26% think the market’s rapid rebound from the news proved that fears were overblown.
  • When asked about the sustainability of the economic recovery, 55% of respondents said that, despite the pop in the number of jobs created in June, the fact that the unemployment rate recently inched up and that average earnings have been fairly stagnant indicate that things may be beginning to trend down; 45% of respondents think the recovery remains stable and that there is no indication a downturn is on the horizon.
  • 73% of respondents think that the Federal Reserve will wait to raise rates again until after the presidential election has passed, in order to avoid the possibility of harming the Democratic party; 27% of respondents think the Fed is likely to raise rates at one of its next meetings, given that Brexit has passed and that it doesn’t appear that there is a need for quantitative easing.
  • With the 10-year Treasury yield down to a new cycle low, Roundtable members were asked whether they believe the next 25 basis point move will be up or down. 69% of respondents believe it will be up, while 31% think it will be down.
  • When asked where they believe the best investment opportunities currently are, 65% of respondents think that it is once again time to increase exposure to the emerging markets sector, following its three year lag; 35% think the best investment opportunity right now is a bet against the pound and British stocks because of the loss of confidence in Britain over Brexit.

July’s “bonus” question: This year marks 30 years since Ferris Bueller took his infamous day off and Roundtable members were asked what they think would have become of the characters if the movie picked back up today. 62% of respondents believe that, despite his popularity at school, poor grades would have led to Ferris becoming the manager of a local 7-Eleven, while Sloane would have gone on to marry the captain of the football team at her Ivy League school and Cameron would have gone on to take the reins of his family’s business. 38% of respondents think Ferris and Sloan would have married and lived happily ever after, with Ferris parlaying his ability to get around the rules into a profitable trading career –at least until the discovery that he was running a Madoff-like Ponzi scheme. Cameron, having suffered a nervous breakdown following the trio’s day off, would have gone on to work for the IRS where he could devote his life to following the rules.

About The New York Hedge Fund Roundtable:

The New York Hedge Fund Roundtable is a non-profit organization focused on promoting ethics and best practices within the alternative investment industry. The membership consists of investors, fund managers and other industry professionals who regularly meet to discuss current issues within the industry and connect with peers. Monthly events center around thought-provoking speakers and panels designed to keep members apprised of timely and important issues within the alternative investment industry. The Roundtable’s goal is to provide a forum for thought leadership, where industry professional have the opportunity to enhance their knowledge and skills and to network with other individuals committed to advancing the industry with the highest ethical standards. For additional information about the Roundtable, visit: http://www.nyhfr.org

 

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