Tahoe-Truckee Market Beat: The Fed and rising interest rates
December 7, 2015
One of the most widely discussed topics in the press lately has been the question of when will the Fed start raising interest rates.
The next FOMC meeting is scheduled for next week, Dec. 15-16. Many forecasters are predicting that we'll see a rate increase at the next meeting. If not, an increase in early 2016 looks highly likely.
Patrick Harker, president of the Philly Fed, recently said, "Raising rates this year, will in my view, serve to reduce monetary policy uncertainty and keep the economy on track for sustained growth with price stability."
James Bullard, president of the St. Louis Fed, has stated that keeping interest rates near zero could lead to an environment where we'll be stuck in "permazero" with low interest rates and low inflation for a considerably long time.
If they do raise rates it will probably be 25 basis points or 0.25 percent. The Fed has maintained ZIRP, or its zero interest rate policy, for a long time now. The record low rates have stimulated the economy but have made times very troublesome for conservative savers and investors.
In a normal interest rate environment, an investor fortunate enough to have $1 million saved could get an income of $45,000 to $50,000 per year by investing in risk-free, 10-year US Treasury bonds which are backed by the full faith and credit of the United States government.
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The yield on the 10-year Treasury is currently about 2.2 percent and has risen from its all time low of 1.45 percent over the last year or so.
The Fed looks at several factors when making rate decisions and has repeatedly stated that they do not wish to be locked into a rules based approach.
They consider inflation and have an inflation target of about 2 percent. They also consider the health of the labor market and the jobs report for November was fairly strong — 277,000 jobs were created last month, and the unemployment rate stayed at 5.0 percent. Average hourly wages rose by 0.2 percent. One area of weakness in this economic recovery has been stagnant wage growth.
Rate increases will be helpful for some investors and savers. Be careful if you have an adjustable mortgage or own long term bonds or bond funds. The price of bonds falls as interest rates rise.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.
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