PASADENA, Calif., Jan. 14, 2015 /PRNewswire/ -- Portfolio manager and research analyst John L. Bellows of Western Asset Management, an affiliate of Legg Mason, believes that the U.S. Federal Reserve "will raise rates only when it is 'reasonably confident' in its forecast" for U.S. inflation. That may mean the Fed is unlikely to raise rates in mid-2015 – contrary to many published estimates.
"We think the risks to the inflation outlook are material and will likely cause the Fed to delay rate hikes while it works to develop 'reasonable confidence,'" writes Mr. Bellows.
"As a result, we think the Fed's first rate hike is unlikely to happen in June, and is more likely to happen sometime toward the end of the year," he projects. "Fed policy, and the front-end of the US yield curve, will be counter-cyclical in 2015."
The Western Asset Policy Matters white paper, Fed Outlook for 2015, can be accessed at: http://www.westernasset.com/us/en/research/whitepapers.cfm
With significant experience in the financial markets, academia and in high-level advisory positions with the U.S Department of the Treasury, Mr. Bellows bases his analysis on four important risks: (1) falling oil prices, (2) U.S. dollar appreciation, (3) additional easing from the European Central Bank (ECB) and the Bank of Japan (BoJ), and (4) falling global inflation.
"In each case, there is a plausible argument that any impact on inflation will be mild and transitory, which appears to be the Fed's base case," he writes. "However, there is also an argument that the impacts on inflation will be more lasting and pernicious. While these more pessimistic scenarios may not be the base case, they are likely to cause the Fed to be cautious in 2015, and are key in our reasoning that hikes will be somewhat delayed."
Public statements made in December 2014 by Fed Chair Janet Yellen indicated that she expects core inflation to "move back toward our 2 percent longer-run inflation objective over time."
As for the implications for investors, Mr. Bellows believes "a delayed Fed reaction is already priced into the U.S. rates market."
"Rather than focusing on the level of rates, the more important implication of our view is that Fed hikes will be responsive to developments around the world, in so far as these developments generate further downside risks to the inflation outlook here in the U.S." If "the inflation outlook were further called into question, we think the Fed would respond by delaying rate hikes. This would in turn cause yields on the front end of the U.S. curve to move lower, meaning that short-dated Treasuries would outperform. As such, the front end of the U.S. yield curve could provide a valuable offset to credit positions in an environment of weakening global growth."
About John L. Bellows Ph.D.
John Bellows joined Western Asset Management in 2012 as a portfolio manager/research analyst. From 2009 to 2011 he served in the U.S. Department of the Treasury in three capacities: Acting Assistant Secretary for Economic Policy; Deputy Assistant Secretary for Microeconomic Analysis; and Senior Advisor in the Office of Economic Policy. Mr. Bellows earned a Ph.D. in Economics from the University of California, Berkeley, and a B.A. in economics, magna cum laude, from Dartmouth College.
About Western Asset Management
Western Asset Management is one of the world's leading fixed-income managers with $472 billion in assets under management as of September 30, 2014. The firm is a wholly owned, independently operated subsidiary of Legg Mason, Inc. (NYSE: LM) From offices in Pasadena, Hong Kong, London, Melbourne, New York, São Paulo, Singapore, Tokyo and Dubai, the company provides investment services for a wide variety of global clients, across an equally wide variety of mandates.
About Legg Mason
Legg Mason is a global asset management firm, with $709 billion in AUM as of December 31, 2014. The Company provides active asset management in many major investment centers throughout the world. Legg Mason is headquartered in Baltimore, Maryland, and its common stock is listed on the New York Stock Exchange (symbol: LM).
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