Expect one more US rate hike this year even if Ivanka Trump is leading the Fed, UBS economist says

3 Jul 2017 11:58 AM

By CNBC : The Federal Reserve has locked itself into a strategy to raise rates one more time this year despite whoever is leading the central bank, a global economist at UBS Wealth Management said.
"I think there's a realization that policy-makers are accepting we've got more normal economic growth, we've got more normal inflation, and they're going to tighten policy and that's filtering through to the bond markets," Paul Donovan told CNBC on Monday.
Data released in the U.S. last Friday showed that inflation rose 1.4 percent in May from a year earlier, below the Fed's target rate of 2 percent. Nonetheless, Donovan from UBS believes that the Fed will increase rates at least one more time this year, "but more importantly I think we've got a long-term quantitative policy tightening program coming through."
"If you get the wrong person leading the Fed then there is a problem. So what I think the Fed is doing is locking itself into a long-term strategy and then even if we get Ivanka Trump as head of the Fed next year, they've got a long-term quantitative policy exit strategy, which would be really difficult to overturn," he said.
The current head of the U.S. Federal Reserve Janet Yellen is due to conclude her term in January of next year. During his campaign, President Donald Trump criticized Yellen for keeping rates low for political reasons and said he would likely replace her.
Don't listen to central banks; look at the real economy
Meantime, as central bank officials have shaken the markets with their comments over the past week, one chief executive told CNBC it's time to look at the real economy and pay less attention to their statements.
"I think I'd be watching less the central banks, because as we said not that much has changed, I'm watching more what's going on in the real economy. What's going on about earnings momentum, is that earnings momentum that we had in the first half of the year going to stay up or is it going to flatten?," Lothar Mentel, chief executive officer at Tatton Investment Management, told CNBC.
The euro spiked last week after traders interpreted remarks by the European Central Bank President Mario Draghi as an indication that it's getting ready to reduce monetary stimulus. The bank's vice-president, Vitor Constancio, shortly after told CNBC that Draghi had not signaled any change in policy.
Mark Carney, governor of the Bank of England, also sent sterling higher last week, after stating that continued growth in the U.K. economy would eventually lead to an increase in interest rates.
Mentel also told CNBC that it shouldn't be news for the markets that central banks will tighten their policies. "What's news for the markets is to have these hawkish tones when actually the economy globally isn't going quite…as synchronized as it was before," he said.
"That nervousness of the markets is exactly why we've gone 5 percent equity underweight because we see them just overreacting to any piece of news that comes out because they feel highly valued," he added.
Mentel is overweight on European equities and underweight on U.S. stocks.

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