The International Monetary Fund recently slashed global growth forecast amid slowdown in Europe and weakness in Japan. But lackluster global growth is unlikely to snuff-out the US bright spot, said Rick Reider, chief investment officer for fixed-income at BlackRock Inc.
The US economy is moving in a pretty robust fashion with energy and technology driving growth. A bottomed out housing market and a largely deleveraged system only adds to the positives. The economy has grown by about 3.8-3.9 percent in the second and the third quarter, which is far higher than the 10-year average of 1.6 percent. With unemployment rate at 5.9 percent, the Fed can make a move as most data point indicates these are not unusual times, he explained.
Asked to explain the conundrum of a falling unemployment rate and a falling labor participation rate that is pushing up the long-term unemployment rate, Rick said aggregate data generally gives good indications about the health of the economy. The US is essentially enduring a two-speed economy now. The skilled workers are doing exceedingly well while the less-skilled workforce is falling behind. The aggregate data shows things are improving though there is a bifurcation that is difficult to miss, he noted.
Asked to explain his optimism about the US economy, Rick said investors need to first de-link the US from the global economy, especially from the economies of Japan and Europe. The domestic economy, which operates in a closed fashion, can sustain the momentum with energy, technology and innovation being the key drivers, he argued.
“When the central bank buys private assets, it distorts markets and undermines its claim to independence. Ambiguous boundaries create expectations of intervention in future crises, dampening incentives for the private sector to monitor risk-taking,” observed Jeffrey Lacker, President of Richmond Federal Reserve Bank in a recent article in the WSJ.
Asked if the Fed stepped out of bounds and stayed there for too long, Rick said quantitative easing and aggressive monetary policies for long periods of time were appropriate policy responses from the Federal Reserve.
The Fed can start to move on interest rates as the transmission mechanism will hardly be affected if the Federal Funds Rate (FFR) moves from zero percent to one percent. However, they can create distortions in the market and the costs can outweigh the benefits, he said.
Asked if the economy would suffer any damage if the Fed chooses to hike rates steeply in an effort to normalize rates, Rick answered in negative. However, there are concerns that, by delaying a rate-hike, the Fed is storing-up an inflation problem down the road.
The economy pivots off the long-end of the interest-rate curve because of capex spending and housing. If the short-end of the curve stays down, that drives the economy because capex (capital expenditure) increase stabilizes the housing market, he observed.
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