Where US interest rates are heading

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US interest rates are one of the most important topics in finance. The numbers which are used to price pretty much everything else in financial markets. To help us think about where they're going to go, we're joined by Nick Garside of JP Morgan Asset Management. Hello, Nick. Thanks for joining us.

So I think your first chart that you've got here-- you're saying the US Federal Reserve has a pretty good environment in which to raise rates.

It does. This is the radical shift from a year ago. And when you look at the global economic landscape, what you see is one of convergence not divergence.

So when you look at this chart here, this is saying, in aggregate, what central banks are doing. And it's showing them converging. So all central banks expected to raise rates now. This is key for the US, because it means the dollar should be stable. And it will allow the Federal Reserve to raise rates at a more aggressive level.

And I think you're even more enthusiastic. I'm not sure if that's the right word. You think rates are going higher than a lot of people, maybe even the Fed itself is predicting.

Oh, absolutely. So again, when we look at what the market's predicting for both this year and next year, including the March hike, it's got four rate hikes. The Federal Reserve themselves are at six rate hikes. Our view is eight rate hikes for this year and next year. And that will take interest rates to, on a real or inflation-adjusted basis, just a little bit tight.

And what is it you think that is going to happen to drive that? Is this, you already see the factors in place that are going to cause this, or are you expecting something to change which maybe the rest of the market hasn't caught onto yet?

So it's a little bit of both. So certainly, when we look firstly at underlying rates of economic growth, very positive. And think of any economy in the world, virtually, and it's running at above trend rates of growth.

But as we look forward, this is the key. We're about to see the return, in a big way, of animal spirits. And what this chart shows is the percentage of consumers with a favourable view of economic conditions. And when you look at this blue line here, it is off the charts, surpassing even expectations in the Reagan era of the early 1980s.

So this is phase two. This is yet to come. When we see policies around tax reform, it will drive animal spirits, and it will drive economic growth substantially higher.

I think we've seen Donald Trump has faltered in his first big policy smash. They didn't manage to repeal Obamacare. And now, we're hoping for tax reform. But obviously, this maybe is a little bit more tricky than many people had simply assumed after he was elected. Do we need to get that coming through, or is this already under way and isn't going to matter if we get massive tax cuts or not?

So the underlying rate of economic growth is very supportive for this. As we look forward, this is a 2018 event. And this is what drives the Fed a lot tighter in 2018. It means things like 10-year treasury yields-- expect those at the end of the closer to 3 and 1/2 percent not 2 and 1/2 percent.

Great. Well, thank you very much for joining us, Nick.