Nathan Sweeney, investment manager, Architas
Since the financial crisis of 2008, the major developed world economies have seen historically low or even zero interest rates. As they gradually come out of this great recession, the expectation is that interest rates will start to rise. Despite a balance of conflicting views in the market, the US Fed chose to leave rates unchanged in September, citing continued weakness in domestic inflationary pressures and concern for global economic and financial developments.
Fed Chairman Janet Yellen gave what was described as a fairly “dovish” statement. She noted that although the US labour market has shown promising signs of recovery, overall expectations for rising GDP growth and inflation have been reined back and Fed forecasts for 2016 and 2017 have been shaved. Given the Fed’s ‘dual mandate’ to monitor both employment and inflation, it is unlikely to raise rates significantly while inflationary pressures appear so weak, even though unemployment is low.
Yellen stressed that the Fed’s policy will remain “highly accomodative” and “for quite some time”. Although the markets may fear that the Fed risks playing catch up, with interest hikes chasing upticks in inflation over the next few years, it may be that this time around the Fed would be happy to see some inflation in US business and financial expectations in order to avoid the years of deflation experienced by economies such as Japan.
A Fed rate hike is data dependent. Although December remains a possibility, early 2016 could seem more likely as the effects of 2015’s stronger dollar and weaker oil prices drop out. The markets remain nervous, which continues to point to maintaining a more diversified portfolio.
Kevin O’Nolan, portfolio manager, Fidelity Solutions
I have been expecting the Fed to be the first major central bank to raise interest rates for the past few years. While I was not expecting this to happen at the most recent meeting I was surprised by the dovish tone struck by the Fed and the emphasis placed on undershooting inflation.
Before the meeting, I would have been confident that the Fed would hike before the end of the year, but now I think it is closer to a 50-50 split. For the Fed to hike in December I think we need to see a rise in the oil price or other commodities and for this to begin to feed through into inflation expectations.
The immediate effect of this month’s meeting has been to push both bond yields and the US dollar lower. US dollar strength has been a headwind for commodities and emerging market equities, so a lower dollar should prove positive for these asset classes, at least in the short term.
Looking further out, the normalisation of monetary policy should extend the trends that have been in place in recent years. That said, the Fed’s dovish twist may be a hint that monetary policy divergence is close to its limit and that the path of rate rises will be extremely slow while other central banks are still easing. If this is the case, the Bank of Japan (which I think has been waiting for the first rate rise to weaken the yen and help it ease conditions for the Japanese economy) will be forced to deliver further stimulus.
Anthony Willis, investment manager, F&C Investments multi-manager team
We are not likely to see a trend for interest rate rises for some time yet. Even those countries expected to raise rates the soonest, for example the US, appear reluctant to raise rates as concerns over international developments overshadow continued economic growth and improving employment data at home. Inflation in the US and UK remains well below target and the Bank of England is likely to also hold fire on rate rises until 2016 at the earliest. In fact, given concerns over global growth and deflationary pressures, if rates were not already at their lows, there would probably be more chatter about rate cuts in the US and UK.
The US Federal Reserve, notwithstanding its decision not to raise rates in September, is the most likely to turn ‘hawkish,’ though it has made it clear the trajectory of any rate rise, when it does come, will be very shallow. It has also set the bar quite high to begin this process given it has noted the importance of financial conditions at home and overseas.
Globally, markets appear to be trying to price in a Chinese slowdown and a US rate rise, meaning financial conditions have tightened. If we do see a rate rise, pressure on emerging markets will escalate and the dollar will likely see further strength.
A US hiking cycle may not be followed elsewhere however, in fact we are more likely to see more easing than tightening. It is possible that we will see increases in quantitative easing from the European Central Bank and the Bank of Japan in the coming months. Meanwhile the Chinese central bank is also likely to further loosen monetary policy to soften the impact of its domestic economic slowdown.