Articles tagged with: unemployment

Why It Might Be Time for the Fed to Raise Rates

In doing so, the central bank would cast a vote of confidence in the economy.

Provided by Mike Moffitt

Will the Federal Reserve make a move in December? As our central bank has avoided tightening U.S. monetary policy for nine years, an end-of-year interest rate hike might seem more possible than probable. Call it a strong possibility, if nothing else – after the November 18 release of the October Fed policy meeting minutes, trading in Fed funds futures indicated that investors saw a 68% chance of a December rate hike. In late October, they saw only a 38% chance of that happening.1

The October Fed meeting minutes sent a strong signal. They noted that “most” Federal Open Market Committee members thought that conditions for a rate increase “could well be met by the time of the next meeting,” with another passage stating that “it may well become appropriate to initiate the normalization process” at that time.2

Investors want some certainty when it comes to monetary policy. The S&P 500 advanced 1.6% on November 18, carried by gains in financial shares (banks would benefit greatly from higher interest rates). It was the biggest one-day rally U.S. equities had seen in a month. After the FOMC elected to refrain from raising rates in both September and October, the question became “when?” To many market observers, the October FOMC meeting minutes seem to provide an answer.1

The next jobs report could be a major influence. In October, the economy added 271,000 new jobs with 2.5% annualized wage growth and unemployment falling to 5.0%. If the next Labor Department employment report shows hiring well above the 200,000 level in November, the Fed could interpret that as a clear green light.2

The Fed would be going against the grain by raising rates in December. The People’s Bank of China has lowered its benchmark interest rate six times since October 2014. The European Central Bank, which has launched a major monetary stimulus, has reduced its key interest rate to 0.05%. Some analysts believe it could hit zero. The ECB’s deposit rate is currently at -0.2%.3,4

Even so, investors might appreciate a decisive Fed move. The markets need to have confidence in the Fed, and as CNBC Fast Money panelist Guy Adami recently noted, a hawkish move might be followed by a long dovish interval – the FOMC could raise the federal funds rate in December, then leave it alone until late 2016. That could amount to a best-case scenario for Wall Street.5

Besides placating the market, are there other notable reasons to raise rates? Adami’s Fast Money colleague, Euro Pacific Capital CEO Peter Schiff, begged to differ. On the same broadcast, he shared his opinion that the Fed is standing pat because it feels the economy is not yet strong enough to handle a rate hike. “This is a bubble … not a recovery,” he commented, adding that Wall Street remains in love with easing and “easy money.”5

These points of view aside, many analysts, journalists and market participants see a December rate move (and the tightening that would presumably follow it) as a net positive. As Cuttone & Co. senior vice president Keith Bliss told the Wall Street Journal, “I think it’s a relief for the market that in the opinion of the Fed policy makers the economy is not falling apart.”1  

One thing is certain – the federal funds rate will eventually rise from its current historic low, perhaps very soon, as what should be the first step a tightening cycle. In light of this eventuality, you might want to review your investments and your financial strategy.

Mike Moffitt may be reached at ph# 641-782-5577 or email: mikem@cfgiowa.com.

Website: www.cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – tinyurl.com/nexyes9 [11/18/15]

2 – foxbusiness.com/economy-policy/2015/11/18/federal-reserve-minutes/ [11/18/15]

3 – reuters.com/article/2015/10/23/us-china-economy-policy-idUSKCN0SH18W20151023 [10/23/15]

4 – usnews.com/news/business/articles/2015/11/18/as-us-prepares-to-hike-rates-europe-could-reap-benefits [11/18/15]

5 – thestreet.com/story/13301410/1/with-latest-fomc-statement-released-will-or-won-t-the-fed-raise-rates.html [11/19/15]

 

 

 

Rising Interest Rates

How might they affect investments, housing and retirees?

How will Wall Street fare if interest rates climb back to historic norms? Rising interest rates could certainly impact investments, the real estate market and the overall economy – but their influence might not be as negative as some perceive.

Why are rates rising?
You can cite three factors. The Federal Reserve is gradually reducing its monthly asset purchases. As that has happened, inflation expectations have grown, and perception can often become reality on Main Street and Wall Street. In addition, the economy has gained momentum, and interest rates tend to rise in better times.

The federal funds rate (the interest rate on loans by the Fed to the banks to meet reserve requirements) has been in the 0.0%-0.25% range since December 2008. Historically, it has averaged about 4%. It was at 4.25% when the recession hit in late 2007. Short-term fluctuations have also been the norm for the key interest rate. It was at 1.00% in June 2003 compared to 6.5% in May 2000. In December 1991, it was at 4.00% – but just 17 months earlier, it had been at 8.00%. Rates will rise, fall and rise again; what may happen as they rise?1,2

The effect on investments. Last September, an investment strategist named Rob Brown wrote an article for Financial Advisor Magazine noting how well stocks have performed as rates rise. Brown studied the 30 economic expansions that have occurred in the United States since 1865 (excepting our current one). He pinpointed a 10-month window within each expansion that saw the greatest gains in interest rates (referencing then-current yields on the 10-year Treasury). The median return on the S&P 500 for all of these 10-month windows was 7.93% and the index returned positive in 80% of these 10-month periods. Looking at such 10-month windows since 1919, the S&P’s median return was even better at 11.50% – and the index gained in 81% of said intervals.3

Lastly, Brown looked at the S&P 500’s return in the 12-month periods ending on October 31, 1994 and May 31, 2004. In the first 12-month stretch, the interest rate on the 10-year note rose 2.38% to 7.81% while the S&P gained only 3.87%. Across the 12 months ending on May 31, 2004, however, the index rose 18.33% even as the 10-year Treasury yield rose 1.29% to 4.66%.3

The effect on the housing market. Do costlier mortgages discourage home sales? Recent data backs up that presumption. Existing home sales were up 1.3% for April, but that was the first monthly gain recorded by the National Association of Realtors for 2014. Year-over-year, the decline was 6.8%. On the other hand, when the economy improves the labor market typically improves as well, and more hiring means less unemployment. Unemployment is an impediment to home sales; lessen it, and more homes might move even as mortgages grow more expensive.4

When the economy is well, home prices have every reason to appreciate even if interest rates go up. NAR says the median sale price of an existing home rose 5.2% in the past year – not the double-digit appreciation seen in 2013, but not bad. Cash buyers don’t care about interest rates, and according to RealtyTrac, 43% of buyers in Q1 bought without mortgages.4,5

Rates might not climb as fast as some think. Federal Reserve Bank of New York President William Dudley – whose voting in Fed policy meetings tends to correspond with that of Janet Yellen – thinks that the federal funds rate will stay below its historic average for some time. Why? In a May 20 speech, he noted three reasons. One, baby boomers are retiring, which implies less potential for economic growth across the next decade. Two, banks are asked to keep higher capital ratios these days, and that implies lower bank profits and less lending as more money is being held in reserves. Three, he believes households and businesses are still traumatized by the memory of the Great Recession. Many are reluctant to invest and spend, especially with college loan debt so endemic and the housing sector possibly cooling off.6

Emerging markets in particular may have been soothed by recent comments from Dudley and other Fed officials. They have seen less volatility this spring than in previous months, and the MSCI Emerging Markets index has outperformed the S&P 500 so far this year.2

Michael Moffitt may be reached at 1-641-782-5577 or email: mikem@cfgiowa.com
website: cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC.  Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor.  Cornerstone Financial Group and AIM are separate entities from LPL Financial.

The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

Economic forecast set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

The MSCI EM (Emerging Marketing) Europe, Middle East and Africa Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the emerging market countries of Europe, the Middle East and Africa. As of May 27, 2010 the MSCI EM EMEA index consisted of the following 8 emerging market country indices: Czech Republic, Hungary, Poland, Russia, Turkey, Egypt, Morocco, and South Africa.

All indices referenced are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. Past performance is no guarantee of future results.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.
1 – newyorkfed.org/markets/statistics/dlyrates/fedrate.html [5/22/14]
2 – reuters.com/article/2014/05/21/saft-on-wealth-idUSL1N0NZ1GM20140521 [5/21/14]
3 – fa-mag.com/news/what-happens-to-stocks-when-interest-rates-rise-15468.html [9/17/13]
4 – marketwatch.com/story/existing-home-sales-fastest-in-four-months-2014-05-22 [5/22/14]
5 – marketwatch.com/story/43-of-2014-home-buyers-paid-all-cash-2014-05-08 [5/8/14]
6 – money.cnn.com/2014/05/20/investing/fed-low-interest-rates-dudley/index.html [5/20/14]