Home' Trinidad and Tobago Guardian : September 13th 2015 Contents SBG16 FINANCE
SUNDAY BUSINESS GUARDIAN www.guardian.co.tt SEPTEMBER 13 • 2015
This month s Federal Reserve
policy meeting could signal the
end of an era. Policymakers may
decide to raise interest rates for
the first time since the Great
Recession, marking the end of
an era of ultra-low rates that has defined finan-
cial markets for almost seven years.
Although signs of slowing global economic
growth have decreased the likelihood of a Sep-
tember rate increase, many economists still
expect policymakers to take action at least once
this year as the labour market improves. The
Fed has kept its benchmark rate at close to zero
since late 2008 to help revive the economy.
As well as helping the economy, those low
rates have been great for financial markets.
The Standard & Poor s 500 index has almost
tripled since bottoming in March 2009, as
corporate profits have surged.
Bond prices have also climbed, pushing
down yields. In turn, that has boosted demand
for other dividend-rich securities, such as
high-yield bonds and real estate investment
But if interest rates start rising, will that
automatically reverse the stock market s
Jim McDonald, chief investment strategist
at asset manager Northern Trust, explains
what he expects to happen with interest rates,
how that will impact financial markets, and
what investors should, or shouldn t do.
Fed policymakers will meet September 16
Q: Do you expect an interest
rate increase this year?
A: We do expect a rate increase this year.
The Fed is itching to start to get off zero interest
rates, so they will move this year.
They are nervous that they don t have any
dry powder to deal with an increase in financial
markets or economic volatility. They can t
really cut rates any more and the market would
respond negatively to (more) quantitative eas-
ing. They want to get rates up, so that in the
future, if they want to cut rates, they have
Q: How high could interest
A: Over the next year, it could be two interest
rate hikes. So, they would get up to 50 basis
points (0.5 per cent) and then they have to
hang out. Because along with the Bank of
England they will be the only central bank
that is raising rates. The economy is just not
Q: What should investors do
in response to higher rates?
A: There is absolutely no need for panic
around the Fed starting to raise rates. Some
people are concerned about it, but this an
extremely studied event and the market is
rarely disrupted by an event that is over
analysed. And this has been over analysed.
The recent volatility in the market has been
tied to China. And, secondarily it s been tied
to people saying "jeez, you know what? The
major central banks really don t have a lot of
ammo if we do get into a significant downturn."
It s that aspect of monetary policy that has
been of concern. It s not worries about a 25
basis point increase, which, in the scope of
everything else going on, is immaterial.
Q: So investors shouldn't
A: It s a "let s ride this out" situation because
raising interest rates is generally tied to the
economy improving, and the economy is going
to have to be doing OK for the Fed to raise
rates. The history of the stock market is that
it does fine when the Fed starts to raise rates,
because the Fed taking action is corroboration
that the economy is strong.
Q: Which sectors perform
best in a rising rate
A: Typically the financials would be the
stand out performer in that environment.
Financial stocks have been hurt by the low
interest rate environment and they should be
good performers with a higher rate environ-
ment. So they are the number one example.
But we re not overweight financial stocks right
now because we think that the rate increases
are going to be relatively minor.
Q: What's your favourite
sector in the current
A: We re focused more on the fundamental
background of the different businesses. Health
care is one of our top recommendations and
that s because the fundamentals in healthcare
are just so good. And they won t really be
impacted by a small increase in interest rates.
There s been a significant increase in volumes
across the industry tied to the Affordable Care
Act. That s been good news for healthcare
Q: What about bonds?
A: We don t expect a major upset in the
bond market tied to a Fed rate increase. Expec-
tations are already built into the market. We
think that the longer maturity bonds will be
particularly well behaved when the Fed starts
to raise rates. That s because the bond investors
will worry that the Fed is going to slow eco-
STEVE ROTHWELL, AP Business Writer
What to expect from
the Fed on interest rates
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