The Federal Reserve will keep its benchmark interest rate at a record low till the middle of 2011 as Europe’s sovereign debt crisis slows growth and damps inflation, according to Aberdeen Asset Management Plc.
“The market clearly is on something of a knife-edge between inflation and deflation,” said Paul Griffiths, London- based global head of fixed income at Scotland’s largest fund manager, which oversees $259.3 billion. Inflation is “not a primary concern at the moment.”
The Federal Open Market Committee will hold its key rate in a range of zero to 0.25 percent at the end of its two-day meeting today, economists surveyed by Bloomberg News said. Richard Clarida, global strategic adviser at Pacific Investment Management Co., yesterday said the Fed will alter language in its policy statement to reflect a “sluggish” economy.
“In the middle part of next year, we would anticipate to see the Fed start to tighten,” with the rate rising by about 1 percent by year-end, Griffiths said today in Sydney.
Treasuries of all maturities are headed for the best first half in a decade as concern over the impact of slowing growth in Europe prompts investors to dump higher-yielding assets for the safest investments.
Austerity measures in Europe are curbing inflation risk and are also reducing pressure on the region’s central banks to raise interest rates, Griffiths said. Inflation in the U.S. is “somewhat more of a concern,” in the long-term, he said.
“The U.S. is somewhat alone in being a ‘we’ve got to spend our way out of this’ type economy,” he said. “Am I concerned about inflation in the next one year? Absolutely not. Am I concerned about inflation in the next five years? Yes -- tipping point around three years.”
Kansas City Fed President Thomas Hoenig has said that by leaving rates too low, the Fed may create imbalances similar to the housing bubble this decade or the wage-price spiral of the 1970s that pushed the inflation rate to 14.8 percent in March 1980 from 2.7 percent in June 1972.
Hoenig has voted against all three central bank statements this year, saying in April that the Fed’s pledge to keep its main rate low for an “extended period” limits its “flexibility to begin raising rates modestly.”
Aberdeen sold riskier assets across its debt portfolio late last year and won’t “wade back heavily ” until the European sovereign debt crisis, particularly concerns around Spain’s deficit, are closer to being resolved, Griffiths said.
Aberdeen is “cautiously optimistic” on Gilts after the U.K. yesterday announced the biggest budget squeeze in 50 years.
“As a bond investor, I can only applaud it,” he said.
The pound has been the biggest gainer over the past two days against the dollar while yields on 10-year government debt yesterday touched the lowest level since October 2009.
Aberdeen remains underweight on peripheral European bond markets expecting the sell-off in the region to play out further, said Griffiths. Still, the euro may bounce, he said, after dropping 9 percent in the past three months.
“There’s a risk it’s somewhat oversold and we must not discount the political will behind keeping the euro as a viable entity.” Greece, said Griffiths, will not leave the euro.