Fund managers are tearing up the rule books and looking afresh at how to predict investment returns in the US economy.
Leading funds work out likely interest rates with complicated computer modelling.
According to Keith Wade, chief economist and strategist at Schroders, the models say US interest rates should already be on an upward path but the old view of what is normal for rates no longer seems to apply.
Federal Reserve chair Janet Yellen has indicated that official interest rates are likely to sit at the present level for some time yet – as has her counterpart at the Bank of England, governor Mark Carney.
The risk, explains Wade, is if the Fed delays rate rises, is higher inflation in the US or a financial bubble that will make the decision about when and by how much to increase official interest rates much harder to make.
“I hope we are not seeing a repeat of previous policy errors,” said Wade. “Despite clear signs of inflation, the Fed refused to take action and this led to the tech bubble, housing bubble and eventually the banking crisis we have just been through.
“The Fed is hoping unemployment will go down but not by enough to influence the economy, but our view that the number of jobless will fall much faster.
“The odds of this happening again are not small.”
Indian budget doesn’t add up
India’s new Prime Minister Narendra Modi has delivered his first budget speech which has seen positive reaction from investors and business.
However, some analysts feel his figures do not quite add up and are a little sketchy.
For instance, he forecast revenue growth to rise from 13.4% to 15.5% without any corresponding increase in GDP.
Modi did promise to tackle the country’s 4% financial deficit.
“Caution is expressed about the underlying budget assumptions in many quarters,” said , Craig Botham, emerging market economist for Schroders.
“The budget lacks any real detail on how Modi intends to meet his main targets, including commitments for infrastructure projects to relieve congestion at ports and airports. We’ll just have to wait and see how everything pans out.
“His problem will be explaining why he got the figures wrong if he fails to meet the objectives.”
Following a recent visit to India by Chancellor George Osborne and Foreign Secretary William Hague, the CBI has voiced hopes the budget will help strengthen British trade ties with the country.
““British exports to India have risen and we now have the chance for companies from both countries to build trading links that will drive recovery for both nations,” CBI International Director Simon Moore.
