Oh Where Oh Where Have the Rate Hikes Gone?

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Published by Debra TaylorCPA/PFS, JD, CDFA | August 01, 2016

The Fed has been talking about raising interest rates for the last few years, yet only one rate hike has actually come to pass (0.25% increase in December of 2015).  Many of our clients have asked us what data the Fed is considering to determine when to increase interest rates again, as the Fed had initially provided guidance for four (4) rate hikes in 2016.  I wanted to provide you some information on several key economic indicators the Fed is watching as they determine when they feel a rate hike would be warranted.

Economic Growth

One of the broadest and most common ways to measure a nation’s economic activity is by looking at its GDP (Gross Domestic Product).  GDP represents the monetary value of all goods and services produced within a nation’s geographic borders over a period of time.  For example, if apple produces an iPhone in Cupertino, California, this economic activity would increase US GDP.  However, if Apple produces an iPhone in China, that economic activity would not count towards US GDP (it would actually count towards the GDP for China, despite the fact that Apple is a US based corporation).

Quarterly GDP is often compared to the prior quarters GDP, as well as the GDP from the same quarter from prior years, to gauge economic growth.   The greater the percentage gain, the better economic growth.  Although US GDP has been growing, that growth rate has been lower than the Fed would prefer to see prior to increasing interest rates, especially given that increasing interest rates generally increases the costs of borrowing and slows economic growth.

Job Creation 

If any of you own a cat, you understand that the entire species is obsessed with insuring that the forces of gravity remain in effect at all times.  Our cat, Audra, prefers to run her assigned tests in the early hours of the morning, generally using items conveniently located on our nightstands!  Job creation data will have a strong influence on any future rate hikes, just as Audra has an impact on items on our nightstand!  The chance of a rate increase at the Federal Open Market Committee Meeting in June was about one-in-five until the May jobs report arrived (38,000 jobs were created vs. 162,000 expected) showing that far fewer jobs were created than was expected.  As a result, the probability of a June rate hike fell from 21 percent to 4 percent almost overnight.  However, job creation did rebound in June (287,000 according to the labor Department).

Uncertainty Abroad

Great Britain, the world’s sixth largest economy, voted on June 23, 2016 for Brexit (exiting the European Union).   This caused the Prime Minister to resign, talk of succession for Scotland and Northern Ireland, and roiled international markets that despise uncertainty.  The Fed is constantly reviewing global events to determine their impact on the global economy and thereby the US economy.  Brexit, coups in Turkey, and questions about economic growth in China have increased concerns for the global economy and provided the Fed much food for thought.

Lower for Longer?

Jim Bullard, President of the St. Louis Fed, has been one of the more hawkish members of the Fed.  However, Bullard did an about-face on interest rates.  He now says we should expect low rates for some time, and it is possible there will be just one rate increase through 2018!  While fears of rate hikes lingered for a while, they have certainly been alleviated recently and we should be able to enjoy some peace of mind – at least for now.

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