The CIO of this $200 billion fund manager says the Fed has no choice but to raise rates in September

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Over the weekend Fed vice chair Stanley Fischer put the prospect of an interest rate hike by the FOMC at this month’s meeting back on the table. That’s seen US stock futures open a little lower in early Asian trade, helped knock oil back again and seen the Aussie dollar lose the best part of half a percent in Monday morning trade.

The September meeting is now very much “live”: traders are now wondering if the Fed really will move on rates.

Paul Griffiths, the London-based chief investment officer of Colonial First State Global Asset Management’s (CFSGAM) behemoth fixed income and multi-asset solutions group, is in no doubt the Fed will have to act this month.

Speaking to Business Insider last week at his Sydney office Griffiths said he thought the Fed still had to act in September because they have backed themselves into a corner. The result of not acting could be worse than taking the long-telegraphed first move higher in interest rates since 2006, Griffiths said.

While some see Stanley Fischer’s comments as ambiguous, even ‘dovish, Griffiths sees no such room to manoeuvre.

Fischer said “there is good reason to believe that inflation will move higher as the forces holding down inflation dissipate further.” He added “yet, because monetary policy influences real activity with a substantial lag, we should not wait until inflation is back to 2% to begin tightening.”

Fischer also said “with inflation low, we can probably remove accommodation at a gradual pace.”

That, to Paul Griffiths, sounds like a man ready to pull the rate hike trigger.

Griffiths told Business Insider this morning that he thought the comments reinforced his expectations rates were about to be lifted. “Fischer’s comments does little to change the view that the Fed is likely to move in the near term,” Griffiths said.

But how high will they go given the outlook?

“Our outlook for fed rates in the next 18 months or so would be toward the 2% level. Although clearly that is somewhat dependent upon the ongoing economic environment, and the path of increases will be very sensitive to the reaction of the US economy and the markets to the first round of increases,” Griffiths said.

That could trigger a wave of market volatility at a time when markets are already nervous.

Griffiths said he thought “a degree of volatility has been factored in by the Fed (as well as other central banks looking at when to move, such as the Bank of England).”

This is an important insight. Last week’s volatility had many traders changing their expectations about the Fed. But as Griffiths sees it, the Fed has been factoring this in already and is prepared to look through it.

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