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Odds of a rate hike stronger than expected: OppenheimerFunds

Lawrence Lewitinn
Lawrence Lewitinn

Though the market is gearing up for a Fed rate hike in December, it may be underestimating the odds of it happening.

Stronger economic data last week led the bond markets to push yields a little higher in anticipation of the first interest rate increase since 2006. But according to one portfolio manager, higher rates are more likely than what’s currently priced into the bond market.

“The market is pricing for a two-thirds chance of a hike in December,” said Ira Jersey, senior client portfolio manager at OppenheimerFunds. “It's much higher than that.”

The recent jobs numbers give the Fed a reason to boost the federal funds rate from the current 0% to 0.25% range in place since 2008.

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“The good jobs report and the fact that we've reached 5% unemployment gives them the opportunity to actually hike,” Jersey said.

While the focus has been on when the Fed will start raising rates, Jersey sees more importance in the pace of subsequent rate increases.

“Although some risk assets like corporate bonds and equities might be a little bit at risk if the Fed hikes too fast, if they [the Fed] are able to convince markets that they're only going to hike very, very slowlyhopefully that means maybe less than once a quarter—then risk assets might actually do reasonably well because the economy is still strong enough for things like corporate revenues and profits to hold up pretty well even with modest Fed hikes,” he said.

The U.S. dollar, which has strengthened against several currencies over the past few years might benefit from higher rates. In the middle of 2014, the U.S. Dollar Index (DX-Y.NYB) was trading around 80. It closed around 99 on Wednesday and has traded several times above 100 this year.

Though Jersey expects the dollar to eventually turn next year to 18 months, he anticipates continued strengthening in the short term, especially if China and Europe ease their own currencies.

“At least for now and early in the hiking cycle, the dollar should perform very well,” he said.

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