Sonal Desai: the Federal reserve is too relaxed

The US central bank is being far too relaxed about the potential consequences of taking out an “insurance” interest-rate cut reckons Sonal Desai of Franklin Templeton.

Sonal Desai, chief investment officer, Franklin Templeton Fixed Income Group

2011 Franklin Templeton Investments Photographer: Kevin NgUnlimited Usage Rights

Markets have been cheered by the idea that Federal Reserve chief Jerome Powell now looks likely to cut interest rates later this month. Yet the US central bank is being far too relaxed about the potential consequences of taking out an "insurance" cut (so-called because the idea is to cut rates "just in case", rather than in response to a downturn in the economy), reckons Sonal Desai, chief investment officer at Franklin Templeton's fixed-income unit, which has $152bn in assets under management.

Advertisement - Article continues below

"You can create distortions in financial markets, and when I see equity markets at record highs in the face of what the Fed is telling us about a worrying economic backdrop, there is something messed up here," she tells the Financial Times. Indeed, Desai sees a good chance of bond prices falling, which would send yields (which have collapsed to record lows in many countries this year) higher again by the end of the year (bond yields move up when prices move down and vice versa).

"We should not underestimate the speed with which the market can reprice," she warns Bloomberg. The trigger is likely to be markets waking up to the fact that the US economy is not facing imminent recession, but is in fact in "incredibly good health", says Desai, who has also worked as an economist for the International Monetary Fund. Recent employment data indicated that the labour market remains solid, for example.

"The Fed is continuing to cave to markets pressure by not looking at the data." But as economic data continues to be stronger than expected, then given that US ten-year government bond yields were at 3.25% less than a year ago, they could easily rise back towards those levels (from their current 2.1% or so) by the year end.




How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019

Why Wall Street has got the US economy wrong again

The hiring slowdown does not signal recession for the US economy. Growth is just moving down a gear, says Brian Pellegrini.
25 Oct 2019
Investment gurus

Terry Smith: I'm not used to being ignored

Running a £20bn fund doesn’t guarantee good treatment from the companies you invest in.
22 Jun 2020
Tech stocks

Jeremy Siegel: "pandemic played right into the hands of the FAANG stocks”

Jeremy Siegel, professor of finance at Wharton, says the tech giants benefited from the closure of many physical businesses.
12 Jun 2020

Most Popular


House price crash: UK property prices are falling – so where next?

With UK property prices falling for the first time in eight years, are we about to see a house price crash? John Stepek looks at what’s behind the sli…
2 Jul 2020

How can markets hit new record highs when the economy is in such a mess?

Despite the world being in the midst of a global pandemic, America's Nasdaq stock index just hit an all-time high. And it's not the only index on a bu…
3 Jul 2020

The end of the bond bull market and the return of inflation

Central bank stimulus, surging post-lockdown demand and the end of the 40-year bond bull market. It all points to inflation, says John Stepek. Here’s …
30 Jun 2020