When will the Federal Reserve raise rates next?
To Eric Stein, co-director of global fixed income at Eaton Vance and manager of two of the firms fixed income funds worth $4.4 billion, the answer to this question doesn’t even matter: the Fed already fell behind 3 years ago.
Stein thinks this discussion is moot.
“In reality they shouldn’t have done QE3,” Stein told Business Insider, referring to the Fed’s third quantitative easing program which was announced in September 2012 and ran through October 2014.
“They probably should have started hikes around late 2013 or early 2014 to get the rates to normal by now.”
According to Stein, the third round of the asset buying program got markets too focused on QE.
“With the benefit of hindsight, QE3 was probably a mistake,” said Stein who manages two of Eaton Vance’s fixed income funds totaling $4.4 billion.
In turn, this caused the taper tantrum that resulted when then-chairman Ben Bernanke said in June 2013 that the Fed was planning to slow and eventually end its asset buying program.
From there the Fed became so worried about the market impact, they slowed down the process too much. And so here we are, nearly three years later, with the Fed having raised rates just once.
“When you look at it every move the Fed has made from the taper to the first rate hike, they have been scared of going too quickly and upsetting the market,” said Stein.
Friday’s February jobs report, however, would argue against this point.
“They’re not behind the curve in the traditional sense of inflation increasing,” Stein told Business Insider. “They’re behind the curve in a business cycle sense, and the later they wait to hike the less time they have to get rates back to normal before a recession.”
Stein said that he sees many economic indicators, such as manufacturing and credit spreads, already weakening and if the Fed doesn’t hike steadily, they will be stuck with little room to cut rates and stimulate the economy when a recession eventually comes.