If you’ve been watching the financial news lately, you’ll know that it’s been dominated by this topic: “When is the Fed going to raise rates?” So, I figured I’d throw my two cents in and let you know what I think is happening now and what will happen in the future.
The Federal Reserve (“the Fed”) is the central bank of the United States. It was created in 1918 to provide a “safer, more flexible, and more stable monetary and financial system.”* Through monetary policy, the Fed has a dual mandate to keep inflation stable and to achieve maximum employment. However, since the Great Recession, the Fed has seemingly been tasked with spurring on the economy and bolstering the stock market. This is largely due to the gridlock in Washington and the inability of our lawmakers to create any meaningful fiscal policy. But, I digress….
The Fed’s main tool in monetary policy is the Fed Funds rate. The Fed Funds rate is the rate at which banks lend money to each other on an overnight basis. This rate creates a baseline for all other short term rates (including savings accounts and CD’s). Currently, the Fed is holding this rate at 0-0.25%, which is why your savings account rate is so low.
But all that’s going to change! Or, is it…? At the beginning of this year, most analysts were predicting that the Fed would start raising the Fed Funds rate in June. This is clearly not going to happen. The main reason is that the economy is not growing at a fast enough rate. If the Fed raises rates too soon (or too aggressively), that could constrict growth and stall the recovery that we are currently in. If the Fed raises too late (or too slowly), we risk hyperinflation. Now, most analysts believe that a September rate hike is in the cards.
I am skeptical. Since the beginning the year, I have believed that the rate hike would not come until early 2016. And, I still believe this. Here’s why:
- The Economy. The economic numbers, while improving, have never seemed that strong. We are growing, but not at a great rate. GDP continues to fall in the 2.5% – 3.0% range. And while unemployment has dropped to the mid 5%, the participation rate hovers at all-time lows (62.8%).
- The Dollar. Over the last year, the U.S. Dollar has appreciated about 20% against the euro. This has a lot to do with the Fed ending its quantitative easing program and the Eurozone starting its own. When the dollar strengthens, it becomes more difficult for our companies to export and therefore affects our GDP growth. Once the Fed starts raising rates, our currency will become even more attractive and even stronger.
- International rates. We definitely live in a world economy and our rates cannot exist in a vacuum. Currently, short term rates around the world are pretty low. However, longer term rates are excessively low. Ten year rates around the world look like this: US – 2.21%, Germany – 0.60%, France – 0.89%, Japan – 0.41%, Hong Kong – 1.60%. Even economically distressed countries such as Spain and Italy have rates below 2%. The Fed can only directly control the short term rates. There is currently substantial pressure to keep the longer rates low. In theory, if the Fed starts raising short term rates, our longer term rates should also rise. But with so much pressure around the world keeping longer term rates low, our ten year Treasury might not move that much. That would create a flat yield curve. This makes it harder for banks to make money and therefore causes them to loan out less. This is exactly what we don’t need.
So, what’s going to happen? I think the Fed will raise rates starting early next year. I believe that they will proceed very slowly and cautiously perhaps raising in increments of 0.05% to 0.15%. And, possibly not at every meeting. This will get interest rates back up to a more normalized level and hopefully avoid stagflation (high inflation without growth).
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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