Lower for Longer: Expect a Slower Path to Higher Interest Rates | American Funds

  • Forms

2016 Outlook

Sustainable income  |  Bonds  |  January 2016
Lower for Longer: Expect a Slower Path to Higher Interest Rates

Muted Inflation and Slowing Global Economic Growth Should Keep a Lid on Rates

“Market participants have focused intensely on the exact timing of the Fed’s first interest rate hike, but the significance of that milestone isn’t as great as one might think. The first move, in my view, is not nearly as important as the slope of subsequent rate increases. I expect that slope to be shallow, with very slow, measured movements. I am less concerned about the first rate hike and more focused on the second, third, fourth and fifth.”

David A. Hoag Portfolio Manager Los Angeles office 29 years of experience (as of 12/31/16)

The Fed Has Raised Rates, but Deflationary Pressures Suggest a Modest Increase

Sources: Thomson Reuters Datastream, IMF.
U.S. unemployment as of December 31, 2015. Core inflation: Period measured covers 12 months ended December 31, 2015. Core inflation, which excludes volatile food and energy prices, calculated monthly as part of the Personal Consumption Index (PCE). U.S. gross domestic product (GDP) represents International Monetary Fund estimate for 2016. China’s change in GDP growth rate represents percentage point change in GDP growth from 2015 to 2016, using International Monetary Fund estimates. ECB benchmark interest rate as of December 31, 2015.

U.S. interest rates may continue to rise in 2016 as the Federal Reserve seeks to normalize monetary policy amid a modestly growing economy. However, the key question facing Fed officials is how far they can go given mixed economic conditions in the U.S. and financial pressures abroad. Many are questioning whether the U.S. economy is strong enough to absorb a meaningful rise.

Deflationary pressures from abroad and a strong dollar are factors that should prompt the central bank to move slower than expected. Many of our portfolio managers expect U.S. rates to remain suppressed for years as the Fed proceeds with caution.

The past two years offered evidence of this trend. As Fed officials have repeatedly voiced their desire to raise rates, the yield on the benchmark 10-year Treasury bond actually declined by nearly a full percentage point as of September 30. Many factors contributed to that decline, including strong demand for Treasury bonds, falling oil prices and the unprecedented expansion of quantitative easing around the world.

Quantitative easing has gone global. Although the Fed halted its bond-buying program in 2014, the European Central Bank launched a new QE initiative in March 2015, to the tune of €60 billion a month. The Bank of Japan has been purchasing ¥6 trillion to ¥8 trillion of assets each month. With bond yields in Germany and Japan below 1%, interest rates both globally and in the U.S. are essentially anchored lower by the weight of monetary stimulus.

Show Me the Munis!


Related Literature

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing. 

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and not to be comprehensive or to provide advice.