New York City Skyline at night

U.S. Interest Rates: The Balancing Act Continues

January 2016


U.S. monetary policy direction continues to attract debate, especially after a rocky start to 2016 but some key risks may lie elsewhere, according to investment experts from across BNY Mellon Investment Management boutiques - Standish, Newton and Mellon Capital.1


One call. Multiple perspectives. Get insights from our panel of experts around the globe following the FOMC meeting.

If you missed our conference call following the FOMC meeting on January 27, you can still get timely commentary and insights to share with your clients. Listen to the replay or read our commentary, which provides a quick roundup of perspectives from our expert panel of global thought leaders. For more information, please visit or call 1-877-334-6899.


There may not have been any surprise moves from the latest meeting by the U.S. Federal Reserve (Fed) but there was a change in tone as the Fed adjusts to the wider global economic and market volatility.

Following the 27 January monetary policy committee meeting, Mellon Capital’s Head of Investment Strategy Sinead Colton, notes the Fed did as expected and even its slightly more dovish tone was anticipated. Calling the Fed’s position “a balancing act” in light of added market volatility and weaker economic numbers, Colton believes it is unlikely the U.S. will see four rate hikes this year as was previously indicated.

Standish’s Deputy Chief Investment Officer David Horsfall agrees four rate hikes “sounds way too much” but he still believes U.S. rates are more likely to go up than down through the course of the year. He notes that while the Fed did indeed sound more dovish following the January meeting, the comments seemed more positive than in September when events in China and subsequent market volatility put a U.S. rate rise on hold momentarily. Still, he adds, as the Fed has become increasingly data dependant, how much interest rates move this year will rely on U.S. employment figures holding up.

The repercussions for the Fed to abruptly reverse direction are such that it is likely a higher hurdle for the Fed than to simply hold rates ...

Sinead Colton, Managing Director, Head of Investment Strategy, Mellon Capital

Peter Hensman, Global Strategist at Newton, disagrees entirely. He believes the U.S. is as likely to restart stimulus as it is to raise rates through the year. He suggests the Fed should look at recent comments made by former Bank of England governor Mervyn King about what history now views as the Swedish central bank’s (Riksbank) error in raising rates in 2010-2011 and then having to sharply reverse direction after inflation remained below its target.2 Hensman notes that Lord King emphasises a significant error made by the Riksbank was to underestimate the importance of global events. Hensman inferred that the Fed could make the same error (if it hasn’t already), after all the stabilization in Chinese equity markets that helped justify the December increase has reversed and the so called ‘transitory’ declines in energy prices look increasingly permanent, he says.

However, Colton says the repercussions for the Fed to abruptly reverse direction are such that it is likely a higher hurdle for the Fed than to simply hold rates and issue more dovish commentary. In addition, she is sceptical as to the global implications of the Fed’s decision in December, noting it is hard to imagine a scenario whereby a 25bp hike derails the U.S. economy. “And if we move to a situation where the U.S. cannot withstand a 25bps rate hike then I think we would see more discussion about the U.S. moving into a Japan-type deflationary scenario.”

China’s influence

Horsfall says global growth has been so muted during the recovery and with U.S. rates so shallow in the first place, even a slight shift from an accommodative stance to being less accommodative could spark increased volatility. However, he dismisses the likelihood of policy error by the Fed and instead believes it more likely any such errors would come from China.

Colton too believes the downward trend in markets in the opening month of 2016 is more attributable to China and its growth prospects. While China’s growth has disappointed, part of the subsequent market reactions have been a result of the lack of transparency in the Asian giant’s economy and a misinterpretation by investors as to the news being received, she adds.

Colton, Horsfall and Hensman do all agree energy prices have not helped the situation. However, Colton notes oversupply in the energy market is not a sudden development. “OPEC members have really been producing significantly above their nominal production ceilings for quite some time,” she says. But the situation has been exacerbated by new energy producers such as the U.S. and Iran’s production coming back online coupled with falling demand from a slowing China. “I don’t see the oversupply situation correcting at least in the short term.”

Opportunities and risks

Horsfall says the knock-on negative implications of the oil price falls have hurt the high yield bond sector. Pointing out that returns from the high yield sector are heavily correlated with the oil price, he says it is hard to get excited about a sector where you know defaults are likely to rise. While he notes not all high yield is in the energy sector, he says it does place a drag on the asset class as a whole. He thinks it unlikely high yield spreads will come down until commodity prices stabilise or defaults do start to occur.

Horsfall indicates that selective opportunities may exist in high yield even with an unstable energy picture but, in general, he remains wary, for now. Hensman says the story is somewhat similar in emerging markets, noting there is increasing divergence across economies. He notes that Newton believes there are active management opportunities in careful selection of companies that benefit from falling input prices, have strong balance sheets and the flexibility to navigate challenging economic conditions. Colton adds that divergent policies globally can result in a significant rise of tactical opportunities across markets and asset classes.

 In response to a question about risks to global economy Newton’s Hensman cites numerous possibilities including: the lifting of sanctions in Iran, the geopolitical stance of North Korea, a possible Brexit and the U.S. election. Colton agreed the possibility of a UK exit from the European Union (or Brexit) and its repercussions could be disruptive to markets as the year progresses and the closer any referendum becomes. In contrast, Horsfall says he will be closely watching U.S. consumer activity. A pillar of the U.S. economy, the consumer market has yet to show concerning signs of faltering, he says, adding if it does it could be detrimental not just for the U.S. but for global growth prospects.

1 BNY Mellon Investment Management EMEA Limited is the distributor of the capabilities of its investment managers in Europe, Middle East, Africa and Latin America. Investment managers are appointed by BNY Mellon Investment Management EMEA Limited or affiliated fund operating companies to undertake portfolio management services in respect of the products and services provided by BNY Mellon Investment Management EMEA Limited or the fund operating companies. These products and services are governed by bilateral contracts entered into by BNY Mellon Investment Management EMEA Limited and its clients or by the Prospectus and associated documents related to the funds.

2 FT: ‘Riksbank frees its hands to intervene in currency market’, 4 January 2016

BNY Mellon Investment Management is an investment management organization, encompassing BNY Mellon’s affiliated investment management firms, wealth management organization and global distribution companies. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and may also be used as a generic term to reference the Corporation as a whole or its various subsidiaries generally.

Important information and risks

This information is not investment advice, though may be deemed a financial promotion in non-U.S. jurisdictions. Accordingly, where used or distributed in any non-U.S. jurisdiction, the information provided is for Professional Clients only. This information is not for onward distribution to, or to be relied upon by Retail Clients.

For marketing purposes only. Any statements and opinions expressed are as at the date of publication are subject to change as economic and market conditions dictate. Views are those of the portfolio managers specified and do not necessarily represent the views of BNY Mellon or any of its affiliates. The information has been provided as a general market commentary only and does not constitute legal, tax, accounting, other professional counsel or investment advice, is not predictive of future performance, and should not be construed as an offer to sell or a solicitation to buy any security or make an offer where otherwise unlawful. The information has been provided without taking into account the investment objective, financial situation or needs of any particular person. BNY Mellon and its affiliates are not responsible for any subsequent investment advice given based on the information supplied. This is not investment research or a research recommendation for regulatory purposes as it does not constitute substantive research or analysis. To the extent that these materials contain statements about future performance, such statements are forward looking and are subject to a number of risks and uncertainties. Information and opinions presented have been obtained or derived from sources which BNY Mellon believed to be reliable, but BNY Mellon makes no representation to its accuracy and completeness. BNY Mellon accepts no liability for loss arising from use of this material. If nothing is indicated to the contrary, all figures are unaudited.

Any indication of past performance is not a guide to future performance. The value of investments can fall as well as rise, so investors may get back less than originally invested. All investments involve risk, including loss of principal. High yield and emerging market investments involve additional risks.

Not for distribution to, or use by, any person or entity in any jurisdiction or country in which such distribution or use would be contrary to local law or regulation. This information may not be distributed or used for the purpose of offers or solicitations in any jurisdiction or in any circumstances in which such offers or solicitations are unlawful or not authorized, or where there would be, by virtue of such distribution, new or additional registration requirements. Persons into whose possession this information comes are required to inform themselves about and to observe any restrictions that apply to the distribution of this information in their jurisdiction. The investment products and services mentioned here are not insured by the FDIC (or any other state or federal agency), are not deposits of or guaranteed by any bank and may lose value.

Firm descriptions:

BNY Mellon Investment Management EMEA Limited (“BNYMIM EMEA”) is the distributor of the capabilities of its investment managers in Europe, Middle East, Africa and Latin America. Investment managers are appointed by BNYMIM EMEA or affiliated fund operating companies to undertake portfolio management services in respect of the products and services provided by BNYMIM EMEA or the fund operating companies. These products and services are governed by bilateral contracts entered into by BNYMIM EMEA and its clients or by the Prospectus and associated documents related to the funds.

This information should not be published in hard copy, electronic form, via the web or in any other medium accessible to the public, unless authorized by BNY Mellon Investment Management.

This information is approved for Global distribution and is issued in the following jurisdictions by the named local entities or divisions: Europe, Middle East, Africa and Latin America (excl. Switzerland, Brazil, Dubai): BNY Mellon Investment Management EMEA Limited, BNY Mellon Centre, 160 Queen Victoria Street, London EC4V 4LA. Registered in England No. 1118580. Authorized and regulated by the Financial Conduct Authority. •Switzerland: Issued by BNY Mellon Investments Switzerland GmbH, Talacker 29, CH-8001 Zürich, Switzerland. Authorized and regulated by the FINMA. •Dubai, United Arab Emirates: Dubai branch of The Bank of New York Mellon, which is regulated by the Dubai Financial Services Authority. This material is intended for Professional Clients only and no other person should act upon it. •Singapore: BNY Mellon Investment Management Singapore Pte. Limited Co. Reg. 201230427E. Regulated by the Monetary Authority of Singapore. •Hong Kong: BNY Mellon Investment Management Hong Kong Limited . Regulated by the Hong Kong Securities and Futures Commission. •Japan: BNY Mellon Asset Management Japan Limited. BNY Mellon Asset Management Japan Limited is a Financial Instruments Business Operator with license no 406 (Kinsho) at the Commissioner of Kanto Local Finance Bureau and is a Member of the Investment Trusts Association, Japan and Japan Securities Investment Advisers Association. •Australia: BNY Mellon Investment Management Australia Ltd (ABN 56 102 482 815, AFS License No. 227865). Authorized and regulated by the Australian Securities & Investments Commission. •United States: BNY Mellon Investment Management; Securities are offered through MBSC Securities Corporation (Distributor, member FINRA) a broker-dealer within BNYM Investment Management. •Canada: Securities are offered through BNY Mellon Asset Management Canada Ltd., registered as a Portfolio Manager and Exempt Market Dealer in all provinces and territories of Canada, and as an Investment Fund Manager and Commodity Trading Manager in Ontario. •Brazil: this document is issued by ARX Investimentos Ltda., Av. Borges de Medeiros, 633, 4th floor, Rio de Janeiro, RJ, Brazil, CEP 22430-041. Authorized and regulated by the Brazilian Securities and Exchange Commission (CVM). The issuing entities above are BNY Mellon entities ultimately owned by The Bank of New York Mellon Corporation.

BNY Mellon Cash Investment Strategies is a division of The Dreyfus Corporation. •Investment advisory services in North America are provided through four different SEC-registered investment advisers using the brand Insight Investment: Cutwater Asset Management Corp, Cutwater Investor Services Corp, Pareto New York LLC and Pareto Investment Management Limited. The Insight Investment Group includes Insight Investment Management (Global) Limited, Pareto Investment Management Limited, Insight Investment Funds Management Limited, Cutwater Asset Management Corp and Cutwater Investor Services Corp. • BNY Mellon owns 90% of The Boston Company Asset Management, LLC and the remainder is owned by employees of the firm. • The Newton Group (“Newton”) is comprised of the following affiliated companies: Newton Investment Management Limited, Newton Capital Management Limited (NCM Ltd), Newton Capital Management LLC (NCM LLC), NCM LLC personnel are supervised persons of NCM Ltd and NCM LLC does not provide investment advice, all of which is conducted by NCM Ltd. Only NCM LLC and NCM Ltd offer services in the U.S. • BNY Mellon owns a 20% interest in Siguler Guff & Company, LP and certain related entities (including Siguler Guff Advisers LLC). •. Standish Mellon Asset Management Company LLC and Mellon Capital Management Corporation are BNY Mellon investment boutiques. Issued as at 28 January 2016.

© 2016 The Bank of New York Mellon Corporation