It’s been nine years since the Fed has done such a thing. Let’s look at each one in detail. It will need to do that by paying banks interest on extra cash parked with the Fed. “The market must already have that information incorporated into the current price” of bonds (and stocks too, for that matter). The Fed has been signaling the move for weeks. There is a sort of “pent-up price deflation” in the eurozone to follow the trend in wage deflation, which we could read as a parallel to Federal Reserve Chair Janet Yellen’s “pent-up wage deflation” for why USA wage growth has remained stagnant in recent years. Traders don’t like surprises.
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And over a longer horizon, the expectations of future rate increases have also diminished. Barring a catastrophe – economic or otherwise – the suspense should come to an end on Wednesday, when the Fed concludes its last two-day session of 2015.
The top-line numbers on the economy do sound excellent: six straight years of growth, with unemployment down to 5 percent, a proxy rate for full employment. Like other strategists, they expect a gradual upwards trajectory for short-term interest rates, following this month’s likely 25 basis-point rate increase. But intermediate and long-term rates have a mind of their own. At the time, many people felt the financial markets were being artificially propped up by the money printing feds, and once QE ended, expectations were for exploding interest rates and the stock market/economy to fall like a house of cards.
But why hike now when inflation is still so low? I compared the United States birth rate (less mortality so that the birth rate is “net” rather than “gross”) and compared it to market interest rates as measured by the 10-Year US Treasury note.
The National Association of Home Builders (NAHB) will release its monthly Housing Index for December, which is comprised of a survey in which participants are asked to rate the general economy and housing market conditions. As rates rise, assets generally move away from gold, which generates no interest or dividend, and towards interest-bearing investments.
Some debtors will feel a little pinch. “When do rate rises really matter?” The sting will hit during the next one or two monthly cycles. Accordingly, markets started to anticipate a more marked pace of tightening through 2016 and 2017 than had been anticipated in 2015. This relative strength is starting to impact exports and corporate profits, and could increase further when the Fed raises rates.
“You could be looking at a pretty nasty payment increase”, said Greg McBride, chief financial analyst at Bankrate.com. It was forced back from a 1-month high of $1.1044 scaled midweek after ECB Governing Council member Erkki Liikanen said Thursday the central bank stands ready to ease monetary policy further if required.
Will rising rates be a bad thing for the U.S.? “Lots of banks are flush with deposits”. Others said they don’t expect major pain even from their bond holdings, as their overall bond duration exposure is fairly short.
Regardless of whether the Federal Reserve changes its guidance by a pittance, I believe low interest rates are here to stay for at least another 15 years, barring any monumental government spending increase. “Loan rates will go up”. Despite much talk about increasing the GST; cutting the company tax rate; and yet another overhaul of superannuation, the government steered a much more conservative course.
Savers with money-market mutual funds should see rates rise a quarter percent – up from near zero today.
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But it’s a different story if you hold bonds through a mutual fund, as most investors do. By this logic, raising interest rates may catalyse growth and investment and, in so doing, actually lead to inflation. That’s because newly issued bonds under those higher rates will pay out more than older ones. “It should be totally obvious”, Ott said. The Fed is now well prepared to act. It’s been sitting at zero ever since then as the Fed has tried to jump start the economy.
