Greenwood Trading – A marked acceleration in 2nd quarter US economic growth and an uptick in inflation has revived speculation about a rate hike.
According to Greenwood Trading, the seemingly interminable speculation about the timing of an interest rate hike by the US Federal Reserve was provided with a timely shot in the arm after fresh data showed the US economy grew at an annualized rate of 4% in the 2nd quarter of 2014.
The disastrous first quarter number of -2.1% was revised upwards making it a double whammy for the world’s largest economy but according to Greenwood Trading, the Federal Reserve is unlikely to take any action before mid-2015 unless there is a consistent leap in activity.
Simeon Kwanda, head of macro-economic research at Greenwood Trading said, “If this data is right, the economy is firing on all cylinders, inflation is above the Fed’s 2% target and employment growth has ticked up. Why, then, is the Fed still buying tens of billions of dollars’ worth of treasuries and mortgage-backed securities each month and why are interest rates still at rock-bottom. The reason is simply that America cannot afford higher interest rates right now.”
The firm believes that while the Fed may continue to reduce its monthly asset purchases, it will hold fire on interest rates until next year. The data was released as the Fed readies its announcement on rates and QE but it was not expected that the strong GDP number would influence this month’s policy decision.
After the announcement, bonds sold off and yields ticked noticeably higher as investors renewed speculation about rate increases. The yield on the US 10 yr spiked to 2.52%, sharply higher than the 2.46% level at which it had traded for most of the morning.
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