So, here we are in late November 2015, having been on Fed watch for the better part of two years. But this time, it’s for reals…! Is it? I think so. Does it matter? Probably not that much. Let’s take a look back at how we got here and what the impending Fed rate hike means.
First of all, what does it mean that the Fed is going to “raise interest rates”? Does it mean your savings account rate is about to go through the roof? Well, not really. The only rate that the Fed directly controls is the fed funds rate. The fed funds rate is the rate at which banks lend to each other on an overnight basis. The loans are used by banks to maintain their reserve requirements at the Federal Reserve. Because these loans are between depository institutions and are made with deposits already held at the Fed, they are considered to be the highest quality and the lowest risk. Therefore, the fed funds rate creates the baseline for all other short term rates.
In July of 2007, the fed funds rate stood at 5.25%. As the financial crisis took hold and our economy dipped into recession, the Fed started to aggressively lower the fed funds rate. They did this to lower the cost of capital and entice companies to borrow money. The more companies borrow, the more capital is flowing and hopefully the more the economy grows. By December of 2008, it had dropped to a target rate range of 0-0.25%.
Fast forward seven years and we are seemingly on the verge of an increase in that rate. The economy has recovered, albeit slowly. And, while we are not showing growth at historical levels, we are clearly moving in the right direction. So, here’s what I think will happen.
I believe the Fed will raise the fed funds rate at their December meeting. Although this is earlier than my previous prediction of early 2016, I don’t think the Fed will wait any longer. I believe that they have talked themselves into a corner and have to move sooner rather than later. And, the December meeting makes sense. The Fed has a dual mandate to keep the economy at maximum employment and to keep inflation stable. The unemployment rate currently sits at 5.0%. Although, the labor force participation rate sits at its lowest level since 1977. And, inflation has indeed been stable, but still at a much lower rate than the 2.0% target set by the Fed.
So, what does this mean overall? Probably not a whole lot. The markets have already priced in this move to a great extent. The stock market seems to be fine with it as the S&P 500 has recovered dramatically since the end of September. The ten year Treasury yield is currently at a 2.26%, up from 2.12% at the beginning of the year. And, the US Dollar has once again appreciated against the euro, reaching $1.0624 per euro, down from $1.2442 a year ago.
What is more important is where rates go from here. Most people expect the Fed to start raising rates. Whether it is next month, early next year, or six months from now, it’s going to happen. The questions are: how fast do they raise the fed funds rate, and what does that mean for longer term rates? I don’t think the Fed will raise rates that aggressively. According to their own projections from the June meeting, the Fed sees GDP only at a 2.3% growth rate by the end of 2017 with inflation finally reaching their 2.0% target rate that same year. This kind of growth will not warrant an aggressive move in short term rates. And, as the Fed does start to raise short term rates, don’t expect longer term rates to move dramatically. With the German 10 year bond at a 0.53%, and Japan at a 0.325%, the ten year Treasury cannot move that much higher. Global growth is still way too weak to justify significantly higher rates.
All this being said, it’s a good thing that the Fed is about to raise rates. It’s a signal that our economy has recovered at least to the point where we no longer need a zero interest rate policy.
Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. Verity Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members.
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An Investment Advisor registered through CUSO Financial Services, L.P., Gavin has 22 years of experience as an advisor in the Puget Sound area.
“I believe every client is unique and deserving of a personalized financial plan that will help them reach their individual financial goals. Before I make any recommendations, I like to get to know my clients. By asking the right questions, and developing an honest, trusting relationship I can really get a sense of what’s going to work best for them.”
Gavin graduated from the University of Washington with a BA in Business Administration and started his financial career with US Bank in the Investment Department. Prior to joining Verity in 2006, he spent eight years with Piper Jaffray.
So what is Gavin’s vision for his dream retirement?
“My dream retirement would be absolutely worry free: financially, emotionally, and in every aspect of life. My finances would be in order so expenses for travel, luxuries, and gifts for the kids, grandkids, and great-grandkids would be taken care of. My kids would be financially sound, so I would be confident in their prosperity. This would give me the freedom to travel and play and do whatever it is I want to do.”
When Gavin’s not working, he enjoys spending time with friends and family, watching Husky football, and taking weekend trips around the Northwest.
Gavin is registered to transact securities business in the states of WA, OR, CA, AZ, FL, HI, ID, IL, MN, NM, NY and VA.
*Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. Verity Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members.
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