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Zurich Financial Services Group chief global economist David Hale says the Federal Reserve will take short term rates to 6 per cent in the US by the end of 2000, but that shouldn't be too much of a problem for the markets.
However, if rates get as high as 7 per cent then they will trigger a reasonably sizeable correction of between 20 per cent and 25 per cent in the equity market.
"I don't see a crash in America in 12 months," he told Good Returns at the FPA Convention in Sydney last week. If there is a bear market it "will be a bear market in time, not price."
Hale's other warning to investors is that the strong returns of the US market are unlikely to be sustained.
"Some convergence back to the long term average (return) is probably due," he says.
Over the past decade the US market has produced an average annual return of 18 per cent, compared to a long-term average of 10 per cent.
Hale's view of the world is reasonably positive. He says while Japan has hit the bottom, its recovery is "still quite fragile."
"Japan could rise quite dramatically in the next two years," he says as it moves from stakeholder capitalism to shareholder capitalism.
Hale also says the political revolution that swept through Eurasia during the late 1980s and 1990s has given a second chance to create a global market economy and to share the benefits of the industrial revolution with all of the world's people.
For a wrap on the Federal Reserve's latest moves click here
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