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

(Image credit: 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.

"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.

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"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.

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