Increased risk of volatility from monetary easing, predicts chief economist

The year ahead has the potential for global interest rate rises, greater market volatility, and a technical recession in the US, according to Brian Coulton, chief economist for Fitch Ratings.

In a recent video interview on the agency’s website, Coulton said monetary easing has given fixed income markets a big boost. Total returns on safe assets on 10-year treasuries in the last year have been very strong and this has helped returns across the entire credit market, he said.

“It’s good in the short term but potentially there could be some increased risks of volatility in the medium term from this extra dose of liquidity that’s going into the market,” he said.

“There are two aspects of that which are in particular worth focusing on: the increasing demand for lower credit quality assets, and the exposure to interest rate risk which could be more disruptive as there’s more duration in the market.”

He added that if rates were to go up in the next two years, this could add volatility. This could happen because US inflation is not that low, he added.

“The market is getting tighter, the relationship between nominal GDP growth and bond yields has got really out of kilter,” he said.

He noted that the US equity market looks vulnerable and this matters for the US consumer because a very big share of US household wealth is in equities.

“If we were to see a 20 percent correction, we think that could knock 1 percent off consumer spending. If you add on some sort of confidence effect you could easily be looking at a technical recession in the US,” he said.