Blog Archive

Posts Tagged ‘The Fed’

Implied Forward Interest Rate

Monday, April 10th, 2017

The Fed Rate Hike

Thursday, March 16th, 2017

The U.S. Federal Reserve Board’s Open Market Committee just raised the Fed Funds rate from 0.75% to 1.00%—the second rate hike in three months. These recent increases to the federal interest rate may be causing you to ask what you should do with your investment portfolio in light of this change.

The answer: nothing. First of all, the rate change was incredibly minor, considering all the press coverage it received. In the mid-2000s, Fed Chairman Alan Greenspan raised interest rates 17 times in quarter-point jumps, finally taking Fed Funds to a 5% rate. Over the course of the past few years, the economists at America’s central bank have behaved extremely cautiously.

Second, although you may read that any raise in interest rates is depressing for stocks, borrowing will be incrementally more expensive for American corporations than they were last week. However, it is important to keep in mind that this move was actually a validation of the country’s economic progress in our long slow climb out of The Great Recession.

By raising rates, the Fed was indicating that it believes the companies that make up our economy are healthy enough to survive and prosper under slightly higher interest rates. The markets apparently felt like this was a positive sign that the economy no longer needs to be nursed back to health. The widely-followed S&P 500 stock index rose a full percentage point following the announcement.

Third, the Fed has now moved into a mode where it is fighting inflation, rather than trying desperately to stimulate it. The worst thing that could happen to the economy is a bout of deflation, where prices fall and there are no policy remedies to fix the problem. In the discussion accompanying the rate rise, the Fed’s Board of Governors expressed concern that inflation might rise above their “target” of 2%, hence the tightening. If you read between the lines, they seem to feel that the threat of deflation is over.

Finally, the rate hike was expected and already built into the price of stocks. Additional rate increases are still are expected: at least two and possibly three 0.25% rises before the end of the year. The Fed also signaled that if there is any sign of backtracking, those plans will be scrapped. The rate increases are anything but reckless.

So what WILL be the effect of the rate hike? Borrowing to buy a car or a house will be slightly more expensive going forward than it was last week. The average thirty year fixed mortgage rate this time last year was 3.68%; it’s now up to 4.21%.

Most credit cards and private student loans charge variable rates of interest which will likely increase each time the Fed raises rates. Balances on Stafford, Graduate Plus or Parent Plus loans will remain at their current interest rates, but the rates on new loans will probably rise.

If your portfolio is well-diversified, there’s not much more you can do to ride out a (slowly) rising-rate environment. Ignore the headlines and celebrate the fact that even the most cautious economist in Washington are finally admitting that the economy is on solid ground.

Higher Rates: The Tempest in the Teapot

Friday, December 16th, 2016

After months of speculation, the Federal Reserve Board (the Fed) decided to raise its benchmark interest rate this week. The U.S. economy is humming along, the stock market is booming and the unemployment rate has fallen faster than anybody expected. The incoming Trump administration has promised lower taxes and a $550 billion infrastructure investment which raises the question: what was the Fed waiting for?

The rate increase is extremely conservative: up 0.25%, to a range from 0.50% to 0.75% which, as you can see from the chart, is just a blip compared to where the Fed had its rates ten years ago.

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The bigger news is the announcement of the Fed’s intention to raise rates three times in 2017 and move rates to a “normal” 3% by the end of 2019, which is faster than some anticipated, although still somewhat conservative. Whether an increase to 3% by 2019 will happen is unknown; after all, in December 2015, the Fed was telegraphing two and possibly three rate adjustments in 2016, before backing off until now.

Raising rates is good news for those who believe that the Fed has intruded on normal market forces, suppressed interest rates longer than could be considered prudent, and even better news for people who are bullish about the U.S. economy. The Fed may have been the last remaining skeptic that the U.S. was out of the danger zone of falling back into recession; indeed, its announcement acknowledged the sustainable growth in economic activity and low unemployment as positive signs for the future. However, bond investors might be less pleased, as higher bond rates mean that existing bonds lose value. The recent increase in bond rates at least hints that the long bull market in fixed-rate securities may finally be over.

For stocks, the impact is more nuanced. Bonds and other interest-bearing securities compete with stocks in the sense that they offer stable, if historically lower, returns on your investment. As interest rates rise, the see-saw between whether you prefer stability or future growth tips a bit, and some stock investors move some of their investments into bonds, reducing demand for stocks and potentially lowering future returns. None of that can be predicted in advance, and the fact that the Fed has admitted that the economy is capable of surviving higher rates should be good news for people who are investing in the companies that make up the economy.

The bottom line here is that there is no reason to change your investment plan as a result of a 0.25% change in a rate that the Fed charges banks when they borrow funds overnight. There is always too much uncertainty about the future to make accurate predictions with the incoming Trump administration, the tax proposals, the fiscal stimulation, and the real and proposed shifts in interest rates, the uncertainty level may be higher than usual.

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Please be aware that you are leaving www.kendallcapital.com and will be redirected to a third party website. Kendall Capital has no control over information at any third party site accessed from www.kendallcapital.com. Kendall Capital makes no representation and is not responsible for the quality, content, nature, or reliability of any linked site. The inclusion of any link does not imply endorsement, investigation, verification or monitoring by Kendall Capital. In no event shall Kendall Capital be responsible for your use of a third party site. Thank you for visiting Kendall Capital's website.

Please be aware that you are leaving www.kendallcapital.com and will be redirected to a third party website. Kendall Capital has no control over information at any third party site accessed from www.kendallcapital.com. Kendall Capital makes no representation and is not responsible for the quality, content, nature, or reliability of any linked site. The inclusion of any link does not imply endorsement, investigation, verification or monitoring by Kendall Capital. In no event shall Kendall Capital be responsible for your use of a third party site. Thank you for visiting Kendall Capital's website.

Please be aware that you are leaving www.kendallcapital.com and will be redirected to a third party website. Kendall Capital has no control over information at any third party site accessed from www.kendallcapital.com. Kendall Capital makes no representation and is not responsible for the quality, content, nature, or reliability of any linked site. The inclusion of any link does not imply endorsement, investigation, verification or monitoring by Kendall Capital. In no event shall Kendall Capital be responsible for your use of a third party site. Thank you for visiting Kendall Capital's website.

Please be aware that you are leaving www.kendallcapital.com and will be redirected to a third party website. Kendall Capital has no control over information at any third party site accessed from www.kendallcapital.com. Kendall Capital makes no representation and is not responsible for the quality, content, nature, or reliability of any linked site. The inclusion of any link does not imply endorsement, investigation, verification or monitoring by Kendall Capital. In no event shall Kendall Capital be responsible for your use of a third party site. Thank you for visiting Kendall Capital's website.

Please be aware that you are leaving www.kendallcapital.com and will be redirected to a third party website. Kendall Capital has no control over information at any third party site accessed from www.kendallcapital.com. Kendall Capital makes no representation and is not responsible for the quality, content, nature, or reliability of any linked site. The inclusion of any link does not imply endorsement, investigation, verification or monitoring by Kendall Capital. In no event shall Kendall Capital be responsible for your use of a third party site. Thank you for visiting Kendall Capital's website.

Please be aware that you are leaving www.kendallcapital.com and will be redirected to a third party website. Kendall Capital has no control over information at any third party site accessed from www.kendallcapital.com. Kendall Capital makes no representation and is not responsible for the quality, content, nature, or reliability of any linked site. The inclusion of any link does not imply endorsement, investigation, verification or monitoring by Kendall Capital. In no event shall Kendall Capital be responsible for your use of a third party site. Thank you for visiting Kendall Capital's website.

Please be aware that you are leaving www.kendallcapital.com and will be redirected to a third party website. Kendall Capital has no control over information at any third party site accessed from www.kendallcapital.com. Kendall Capital makes no representation and is not responsible for the quality, content, nature, or reliability of any linked site. The inclusion of any link does not imply endorsement, investigation, verification or monitoring by Kendall Capital. In no event shall Kendall Capital be responsible for your use of a third party site. Thank you for visiting Kendall Capital's website.

Please be aware that you are leaving www.kendallcapital.com and will be redirected to a third party website. Kendall Capital has no control over information at any third party site accessed from www.kendallcapital.com. Kendall Capital makes no representation and is not responsible for the quality, content, nature, or reliability of any linked site. The inclusion of any link does not imply endorsement, investigation, verification or monitoring by Kendall Capital. In no event shall Kendall Capital be responsible for your use of a third party site. Thank you for visiting Kendall Capital's website.

Please be aware that you are leaving www.kendallcapital.com and will be redirected to a third party website. Kendall Capital has no control over information at any third party site accessed from www.kendallcapital.com. Kendall Capital makes no representation and is not responsible for the quality, content, nature, or reliability of any linked site. The inclusion of any link does not imply endorsement, investigation, verification or monitoring by Kendall Capital. In no event shall Kendall Capital be responsible for your use of a third party site. Thank you for visiting Kendall Capital's website.