In a recent edition of A. M. Best’s First Monday series, host John Weber welcomed Jim Gillard, VP of Credit Rating Criteria, to discuss how U.S. economic growth is highlighting the divergence between the United States and the rest of the world.

Mr. Gillard estimates that U.S. GDP will grow an average 3% in 2015, which will stimulate job growth and put downward pressure on the unemployment rate.   He expects inflation to stay within the Federal Reserve’s target range between 1 ½% to 2 ½%. There is more confidence in the U.S. economy than there was a few years ago “following the great recession”, Mr. Gillard says.  While the U.S. is growing, other industrial countries are not. Europe and Japan are both struggling with high unemployment rates and stagnant growth.

Mr. Gilliard believes that monetary policy is going to be the big story in 2015. He expects the Federal Reserve to raise rates in order to get them back to a more “normal range.” He also said that “the divergence in policy that we are going to see in 2015 poses a risk…the U.S. Federal Reserve will begin tightening…raising rates…at the same the European Central Bank and the Bank of Japan are going to continue loosening rates…a giant quantitative easing programs of their own.”

Yields on government bonds remain low, according to Mr. Gilliard. “Emerging markets have slowed and credit spreads…are relatively limited”, which has pushed investors towards government bonds.

Most expect low interest rates for the next year or two. “This has led some insurers to explore other investment opportunities in a reach for yield, particularly alternative investments, including hedge funds and private equity “The companies who are undertaking these types of opportunities have “strong ERM (Enterprise Risk Management) programs and sophisticated investment departments that understand the risk that they are taking.”

We’d like to thank A.M. Best for their contribution to our program.  If you’d like to see more of the First Monday Series, visit the A.M. Best website

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