DARIEN, CT--(Marketwired - June 19, 2015) - Economic data and geopolitical concerns are such that the U.S. Federal Reserve is still unlikely to raise short-term interest rates this year, according to private lending specialist Old Hill Partners, Inc. in its latest market commentary.
Despite language in the Fed's June 17 statement again hinting that a hike is imminent, any hike that occurs will be one of convenience, not necessity, notes Old Hill, citing a dearth of data suggesting a hike is economically necessary.
"The historical early warning signs are just not flashing red," said John Howe, CEO of Old Hill Partners. "In fact, for the most part, they're not even flashing yellow."
On the contrary, some data points are worryingly close to turning red for the wrong reasons, according to Old Hill. The asset manager cites U.S. industrial production, which just missed expectations for the fourth time in the last five months and has been flat for six, as an example.
With the potential exception of unemployment, no benchmark U.S. economic indicator is anywhere near a level historically associated with the onset of Fed tightening, argues Old Hill. In particular, inflation does not support rising rates, with May core CPI of 1.8% fully half of the average 3.6% seen at the start of every tightening cycle since 1972.
Moreover, the potential for a Greek default is climbing literally by the day, notes Old Hill, observing that it would be a brave Fed indeed that hikes U.S. interest rates in the wake of what could be Greece's ejection from the euro.
"All else being equal, benchmark rates could surprise to the downside much more than markets currently expect," noted Howe "This is especially true if the Greek situation deteriorates. The flight out of euro assets and into dollar-denominated safe havens from a 'Grexit' could make previous U.S. Treasury rallies pale in comparison."
Meanwhile, Old Hill's asset-backed lending environment will not be heavily affected by the Fed's timing, Howe said. The increased regulatory hurdles, high servicing costs, and increased capital ratio requirements mean traditional banks are reducing commercial lending to small and medium-sized businesses, a trend unlikely to reverse whether the Fed Funds rate is 0.10% or 0.50%.
"Fundamentally," said Jeff Haas, COO of Old Hill, "the opportunity set for private lenders like Old Hill Partners remains large. When constructed properly, private debt offers investors more attractive risk-adjusted returns than more traditional fixed income alternatives."
Old Hill Partners
Darien, CT-based Old Hill Partners Inc., is an SEC-registered investment adviser with significant experience in asset-backed lending and alternative investment management. The firm offers customized lending products and services to middle market clients seeking creative funding structures for growth initiatives. Founded by John C. Howe in 1996, Old Hill has funded approximately $625 million in asset-backed lending transactions.
Old Hill Partners