Economists: September Rate Hike Likely
As the Federal Reserve prepares to raise interest rates for the first time in nine years, BlackRock Global Investment Strategist Russ Koesterich warned CNBC on Monday that the stock market may see a 10% drop.
“I believe that in the next two to three months, there will be a greater opportunity to buy this market,” he stated. “If you look at markets in and around Fed tightenings, you’ll usually see a 5% to 10% correction.”
On CNBC’s “Squawk Box,” he stated, “When I think about how low volatility is, and the credit markets are telling us slower [economic] growth, that sounds about fair.”
When it comes to rate hike timing, JPMorgan Chief Economist Bruce Kasman told CNBC that the chances of an initial raise at the Fed’s September meeting are 55 percent, despite the short-end of the yield curve predicting a December hike.
“I believe the 10-year yield is expressing a lot of concern about what’s going on globally,” Kasman said, citing the stronger currency and the stock market collapse in China.
It’s a thought that Koesterich shares. “Every global growth indicator is pointing to a slowdown,” he remarked.
Another economic stumbling block will be the publishing of the July employment report by the US government on Friday, which could affect this self-proclaimed data-driven Fed.
“If you look at how fast the unemployment rate has been rising over the last two years, it’s moving faster than it has been at any point since the first tightening in the early 1980s over the last 40 or 50 years,” Kasman said, boosting his case for a raise in September. “GDP hasn’t been very impressive,” he stated at the same time.
The exact date of the rate hike is less crucial than the trajectory once monetary tightening begins, according to Kasman, who expects rates to rise 100 to 200 basis points from near-zero levels imposed in response to the 2008 financial crisis over the next few years.
“Over the next year, [or] year and a half, the market expects very little from the Fed,” he said.
“Perhaps the Fed will take its time, maybe it will be a December hike rather than a September hike,” Koesterich said, “but the truth is that we’re going to see that accommodation being removed at some point in the next six to nine months.”