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Slow Growth for US Interest Rates

LONDON – The US Federal Reserve’s new policy statement will, as usual, be analyzed in excruciating detail in the days ahead, as investors seek guidance on when and how quickly interest rates will be raised. Notably, the word “patient” does not appear, and the Fed has signaled that it may raise its benchmark rate as early as June. But the particular wording is far less telling than the context in which the statement is being released.

In fact, uncertainty about monetary policy in the United States has been the leading driver of financial-market volatility this year. After all, the potential effect of interest-rate hikes on the US yield curve has a major impact on the pricing of all global assets.

But three factors suggest that investors are over-emphasizing the risk of a curve re-pricing. First, economic developments will likely lead the Fed to exhibit caution when it comes to the process of raising interest rates. Second, even if the Fed acts quickly, investor appetite for returns will anchor yields. Third, the technical features of the market will ensure strong demand for US Treasury bills.

Let us begin with the relevant economic developments. The consensus nowadays is that the US economy is growing steadily, with the leading indicators pointing toward further expansion, and labor-market data surpassing expectations. Job creation is strong, with total non-farm payroll employment having increased by 295,000 in February and the unemployment rate falling yet again, to just 5.5%.