With no recessionary triggers on the horizon and U.S. economic data strong, the Federal Reserve could have to hike interest rates in the second half of 2019, said Sonal Desai, chief investment officer at Franklin Templeton in the fixed income group.
“We’re doing very well by any measure. The U.S. is in almost rude good health,” Desai said. She spoke Wednesday at the Morningstar Investment Conference in Chicago.
Unemployment is at decades-low levels, with more job openings available than people out of work. There has also been a broad-based pickup in wages, and because consumers have more income, their savings rates are rising.
The corporate sector is also healthy, showing a pickup in capex spending that is starting to point to increased productivity and is leading to fairly solid corporate profits.
“Nothing dramatically changed between the fourth quarter and the first quarter. Just the sentiment,” Desai said, referring to the stock market drop in the fourth quarter and the rebound in the first quarter.
Because of these strong economic signs, she thinks the Fed may have to raise rates. “We might see a rate hike [in the] second half of the year. I absolutely don’t think we’ll get rate cuts,” she said.
She said the fourth quarter market selloff was a reactionary worry about monetary policy fueling fears of a recession. “Markets have been drip-fed an easy monetary policy for nearly 10 years. Anytime they are worried about monetary policy going forward, we get a reaction. I don’t like looking at the reaction. I want to look at what causes a recession,” she said.
She said the only potential recessionary trigger she is concerned about is the bursting of a financial bubble that would prompt a crisis similar to the 2000 dot-com bubble or the 2008 global financial crisis. Since the financial crisis, she said, there have been three rounds of Fed quantitative easing. The first was “absolutely essential” to add liquidity to markets. It’s debatable whether the U.S. needed a second round of quantitative easing, but the third round was “egregious,” she said.
The Fed’s decision in the first quarter to pause raising rates helped risky asset classes rebound. “The Fed made a judgment call in exchange for volatility today or volatility tomorrow, and we don’t know how much it will be or when it comes. This is definitely a [recessionary] trigger. As of today, I don’t see the bubbles bursting. But are we creating a healthy ground? Absolutely we are. But I don’t see it today,” she said.
Looking to Europe and China, she said she is not concerned about economic slowdowns in either place. She said Europe’s economic strength of two to three years ago was an outlier, while the current growth outlook is more normal. Europe’s slower growth won’t impact the global economy as much since it’s an exporting nation, rather than being a consumer nation.