Tightrope walk could topple Fed, says Mott

The US economic recovery is built on fragile foundations and the Federal Reserve is playing a dangerous game, according to Bill Mott, manager of the UK equity income funds at Credit Suisse Asset Management. The difficult choice facing the Fed is whether to raise interest rates. Mott (pictured) argues that if interest rates are increased from their current 1%, the US economy will start to slow. But if rates remain at these historically low levels and the Fed “remains determined to stay behind the curve”, says Mott, then current levels of economic growth will lead to inflation, which will in turn put more pressure on the dollar. Mott adds: “The Fed is walking a very dangerous tightrope. If the US economy does not sink into a slowdown followed by deflation, or if it avoids a build-up of inflationary pressures, then the Fed will be very lucky. Even if the Fed is that skilful or lucky, this positive potential outcome is already discounted in US share prices. The two alternative and worse scenarios are not discounted in share prices.” Mott likens the US consumer, whom he calls Joe Six Pack, to an athlete whose capacity for press-ups has risen from 50 to 200 because of the steroid-like qualities of interest-rate cuts. “The trouble is that he is now up to his limit on anabolic steroids and any increase in dosage will kill him,” he says. The position in the UK, says Mott, is as unsustainable as it is in the US. He adds: “The UK economy will be very fortunate if it achieves a gentle slowdown in consumer spending without some dislocation. Equally, if Romford Ron continues to spend at his current rate, driven along by ever higher house prices, inflationary pressures will build. “Although the UK stockmarket is less expensive than the American market, the best outcome is for UK equities to be able to deliver total returns of about 6-8% from their current level. “Given the uncertainties of the long-term economic outlook in both the US and the UK, we believe the ownership of high-yielding, predictable, pedestrian growth companies, with strong balance sheets and good cashflow, will deliver the best returns for UK equity investors.”