Rising interest rates won’t derail U.S. recovery

The recent rise in American interest rates won’t jeopardize the U.S. recovery.

So says Luc de la Durantaye, first vice-president of global asset allocation and currency management for CIBC Asset Management. He manages the Renaissance Optimal Inflation Opportunities Portfolio.

He predicts the bump in rates will only “shave 0.1%-to-0.2% [off] U.S. economic activity over the next 12 months. You would [also] need a more substantial rise in mortgage rates” to see a drop in performance.

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De la Durantaye says it’s crucial to consider more than interest rates when assessing economic performance. Analysts also consider the performance of the U.S. dollar, for example.

He says, “If the U.S. dollar strengthens, that’s a negative, on the margin, for the U.S. recovery. And if the equity market declines, that’s also a restraining factor, and…we must monitor oil prices.”

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However, de la Durantaye notes people shouldn’t yet be worried about things like currency and oil, given “the degree to which they have corrected so far isn’t enough to jeopardize the economic expansion” of the U.S.

He points out the Federal Reserve will have to take these factors into consideration when discussing QE tapering during upcoming policy meetings. He says, “From that perspective, it may give [the Fed] pause to be very careful about the wording in their monetary policy.”

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The U.S. recovery has been detected across many sectors. As de la Durantaye says, “The consumer has seen [her] house going up in price substantially over the last 12-to-18 months. The stock market has gone up, and the [value of the] U.S. dollar also has gone up.”

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He adds, “The labour market is starting to improve [so] businesses feel more confident about investing. [And] state and local governments are now in surpluses. They’re no longer retrenching employment, so…[both are] expected to contribute to growth over the next 12-to-18 months.”

On the federal government front, de la Durantaye says there’s work to be done to reduce the U.S. deficit, though he predicts it will shrink at a slower pace this coming year than over the past 12 months.

Overall, he says he’s optimistic about U.S. growth prospects, adding the biggest risk to the U.S is lagging global economies. He says China and Europe need to remain stable.

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