US Federal Reserve ‘in no hurry’ to lift rates, says Nuveen’s Brian Nick

A dovish US Federal Reserve will not raise rates until 2023, contrary to market expectations, according to Nuveen’s chief investment strategist Brian Nick.

Brian Nick, chief investment strategist for US asset manager Nuveen, doesn’t see the US Fed raising rates before 2023. Picture: Bloomberg

A dovish US Federal Reserve will not raise rates until 2023, contrary to market expectations, according to Brian Nick, the chief investment strategist at $US1.2 trillion US asset manager Nuveen.

Mr Nick, who began his career in the markets group at the New York Fed, sees inflation pressures easing toward the middle of next year and expects the Fed’s patience on asset purchases and interest rates to drive more dollars into equity markets as investors seek out yield.

“The market is getting a bit more aggressive, pricing in rate hikes that are even more hawkish than the dots were last time we heard from the Fed. We think that that’s wrong and that the Fed will not need to or feel inclined to raise rates until 2023,” Mr Nick said.

What happens between now and then will be a string of somewhat dovish surprises, he said.

“Inflation will decelerate quite a bit next year, and that will give the Fed some cover. Even if it decelerates to a relatively high level, say 2.5 or even 3 per cent, that will be significantly less than what we’ve seen.

“The Fed will be able to point to that and say look, these inflationary pressures were transitory, we’re not in a rush to raise interest rates.”

Alongside the easing of inflationary pressures, the Fed would also look to avoid a repeat of its performance in the wake of the last crisis, Mr Nick said.

“I think the Fed thinks they raised rates too high too soon last time around. And they were forced to reverse a lot of those rate hikes in 2019, when the economy got a little bit softer again.

“They’re committed to not making that same mistake again, they want to run the economy on the brink of overheating.

“They want to see higher wage growth at the lower end, they want to see broader participation in the recovery.”

Mr Nick said the Fed would be “reasonably happy” with the recovery progress to date.

The composition of the US central bank board would also play a part in the slower rate moves.

“The composition of the committee will be more dovish next year because Biden is going to appoint two or three Fed governors, and will probably reappoint Powell as well,” Mr Nick said.

“So there’ll be an overall more dovish composition of the committee if he’s appointing people who are inclined to keep interest rates very low and to err on the side of pushing inflation a bit higher, as long as it means very low unemployment rates too.”

Nuveen, one of the largest investment managers in the world, is going against the grain with its rate call: money markets are tipping a more aggressive approach, pricing in at least one rate hike in 2022.

If the US central bank takes a more dovish stance it will push more money into higher-yielding assets, including equity markets.

“The runway is still looks pretty good,” the investment strategist said of the outlook for stocks.

“A very patient Fed can help investors continue to get reasonably good returns from stocks, from credit, and certainly from real estate as well.”

But investors should temper their expectations after two very healthy years of returns, he warned. The S&P 500 rose 20 per cent in 2020 and is up close to 20 per cent this year.

Mr Nick is tipping gains of 5 to 10 per cent for next year based on the expected slowdown in earnings. He sees defensive stocks faring best as growth slows and inflation expectations come back down to earth.

“That type of environment tends to be a bit better for somewhat more defensive sectors and growth, parts of the market like technology, healthcare, and some of the consumer sectors as well.

“So I’d be looking more at the growth versus value, some of the more defensive versus cyclical.”

Alongside equities, Nuveen is positive on real estate and credit. Illiquid real assets, like farmland and timber, are also attractive.