Insider Q&A: Keeping an eye on the Federal Reserve and interest rates

By Marcy Gordon
AP Business Writer

WASHINGTON (AP) - The Federal Reserve chose recently not to raise the benchmark interest rate and made it clear it isn't in a big hurry to make the next move higher. After the global economy shuddered earlier this year and U.S. economic growth weakened, the Fed has slowed the march toward higher rates that it signaled in December.

John Bailer, senior managing director at The Boston Company, which has $36.2 billion in assets under management, is assessing the Fed's actions and the potential impact on the market. Bailer is co-portfolio manager of The Boston Company/Dreyfus Strategic Value Fund and portfolio manager of the BNY Mellon Income Stock Fund, among others.

The Q&A has been edited for clarity and length.


Q: How should the market view the Fed now?

A: What I really believe is that the Fed has got it right, finally. In December I think they scared the markets with a potential four rate hikes. And they've kind of dialed that back and become a little more dovish. And now expectations are down to one or two rate hikes this year. And I do think that's Goldilocks for this market. I really do feel like they've found the right place. I think the market can handle one to two rate hikes if the economic data continues to improve.

Q: Where would you put the probability of a Fed rate hike in June?

A: I think it's 50 percent. I feel the economic data will improve.

Clearly we've had a pretty good (company) earnings season here. I believe that is an indication that the economy is starting to improve. The improving economy will cause the Federal Reserve to think about whether rate hikes would be appropriate. That is offset by some of the international concerns the Fed has, one of them being "Brexit" potentially.

Q: There you're referring to the possibility that Britain could leave the 28-nation European Union if a referendum in June calls for it. What about other concerns?

A: Among other things, they're looking at what's going on in China. They do consider what's going on in the global economy when they decide whether to raise rates or not.

It's all interconnected. The perception that the U.S. would raise rates aggressively causes the dollar to strengthen, and that causes oil prices to moderate a little bit and to move down. And it also causes some issues with China in terms of, maybe they want to devalue their currency against the dollar if the dollar's really starting to strengthen as well.

Q: Given the prospects for Fed action, are there certain sectors of the market that investors should be looking at?

A: If interest rates are going to move higher, the financial sector will really benefit. (If) the economy is improving, we think that will lead to slow and steady interest-rate increases that will really benefit a lot of these financial companies out there.

Q: And areas to be avoided?

A: Companies that are what I would call bond proxies, with high-yielding stocks with defensive characteristics. Stocks that look and act like bonds. And people have really piled into these companies. They're in sectors like utilities, staples, some industrials like the defense area of industrials. And in our view, those are the areas of the market that look really overvalued.

If I'm right and the economy is getting better, and interest rates are slowly moving up throughout the year, we think those are the areas of the market that are most at risk.

Published: Wed, May 11, 2016