On Interest Rates, Déjà Vu

Twelve months ago, as our Winter-2015 newsletter went to “press,” markets were awaiting a mid-December meeting of the Federal Reserve, widely expected to deliver the first uptick in base interest rates in years.  And here we are again, anticipating the Fed’s mid-December confab.  The CME’s FedWatch tool reportedly is assigning about a 95% probability that the Fed will hike.

Of course, there are differences from a year ago.  The benchmark 10-year Treasury bond yield has already moved from 1.8% to 2.5% since the election, driven by expectations for more growth-oriented policies coupled with increased government spending on infrastructure and tax cuts. Short-run expectations are for larger federal deficits leading to the issuance of more Treasury debt; ergo, higher yields.

The pieces appear to be in place for the Fed to act.  Core inflation has been running close to that avowed 2% target, and the unemployment rate is hovering near what the Fed has characterized as “full employment.”  But they may not want to get too far out in front of global rates, especially given the strength that has already accrued to the dollar.  Recent comments by influential Fed officials suggest a willingness to let the economy (and inflation) run a little “hotter” rather than risk impeding the expansion.

Back in the 1950s, Doris Day famously sang que sera, sera… whatever will be will be.  As we noted a year ago, “the fuller history simply provides too wide a range of outcomes to assign high predictive probability” regarding the effect of a rate increase.  The Fed will probably act this December, with markets already having taken rates a bit higher all by themselves.

A little more about Capital Financial Planners...

Established in 1984, Capital Financial Planners, LLC is an independent, fee-based investment management and financial planning firm located in Salem, Oregon. We provide wealth management and advisory services to clients in the Pacific Northwest and beyond. Our services include retirement planning, investment management, advisory services for trustees, hourly financial planning and more. We take a holistic and collaborative approach, working not only as our clients’ financial advisors, but as their financial partners.

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