To Raise or not to raise… that is the question.  Syd Leibovitch discusses not only what has happened this week in the economic markets, but also discusses the choices the Federal Reserve is facing this coming week on whether or not to raise rates.

Will the Fed raise rates? Federal reserve meeting next week – The Fed will be meeting Wednesday and Thursday to discuss monetary policy.  On Thursday at 11:00 AM Pacific Time they will announce whether or not they will make their first interest rate increase since 2006. The Fed controls the Discount Rate and Federal Funds Rate.  These rates are overnight rates they charge lending institutions. These are short term rates. When the Fed rises or lowers these rates banks follow with similar increases or decreases to their “prime rates”.  The prime, the rate banks charge their best customers, is at a higher rate than they pay and the spread is their profit.  The Fed began lowering interest rates in 2007 in an attempt to make borrowing costs less expensive to encourage companies and people to borrow more money to spur the economy.  Unfortunately, these rate reductions did not work quickly enough.  They continued to lower rates for almost a year, as the country slipped further into recession. By the end of 2008 their benchmark rates were near zero percent. A rate that has never before been offered by the Federal Reserve. After that, lowering rates was no longer an option as you can’t go lower than zero!  Next they used other methods that had never been attempted. Some of those included purchasing treasury bonds and mortgage securities to lower long term rates. The Fed purchased trillions of dollars of mortgages and treasury bonds before tapering down the buying which ended in 2014.  At one point they were buying $85 billion a month worth of treasuries and mortgages which did bring down mortgage rates to the lowest levels in 50 years.  As the country had emerged from recession and had seen solid job growth the bond and mortgage buying was tapered down slowly until the program ended. That was over a year ago. Experts feel, and the Fed has stated, that because the  unemployment level has dropped nearly to half of what it was in the peak of The Great Recession and growth is more solid leaving fed rates near zero is no longer necessary, and an increase is coming.  It was widely speculated that this rise would come at next week’s meeting, but as other risks to the economy have emerged it is possible the Fed will wait. If the Fed does raise rates it will be the first rise in almost a decade. The stock market has reacted badly to an impending rate rise, but many experts feel that going from near zero to 1/4% is really no big deal and fear is an overreaction. It’s a tough decision for The Fed. Employment news is good, wages showed an uptick in August, auto, home and retail sales have been strong. These factors point to a no-brainier that an interest rate rise is overdue. On the other hand: Inflation is nonexistent. Consumer confidence is dropping. The dollar has risen 17.5% against the currencies of the U.S.’s main trading partners, making our exports more expensive. China, the world’s second largest economy, is in the midst of a slowdown. These all pose a risk to the economy. That’s normally a no-brainer to not raise rates! We will know at 11 AM Thursday either way!

To say the stock markets have been volatile is an understatement! – Next week all eyes will be on the Federal Reserve and their decision to raise rates or leave them at historic near zero levels. A rate rise would increase borrowing costs which could impact corporate profits.  Once the Fed does begin to increase they will probably increase them over a long period of time in very slight increments to get to more normal levels. With inflation below the Fed’s target levels nobody expects them to rise to much before they level out. Low interest rates are bad for seniors, and others who depend on interest income, so a rate rise is not all bad. Many investors want to see rates rise already just to get rid of uncertainty. They are growing tired of fluctuations based on speculation on when the Fed will start raising rates. The same thing happened when The Fed tapered down its bond and mortgage buying program. When it ended bond and mortgage purchases, long term rates rose a full percent, and within a couple months they dropped back down to just above where they were. Other factors to watch are: China’s economy, stock markets and currency which have appeared to stabilize after a drastic decline. Oil prices which have moved off their multi year lows just a couple weeks ago, which has caused nearly 100,000 job loses in the energy sector, and has cut energy companies’ profits. A strong U.S. Dollar which makes our goods (exports) more expensive overseas and foreign goods (imports) less expensive to here, which has stabilized.  The Dow Jones Industrial Average closed the week at 16,433.09, up from last week’s close of 16,102.38.  The S&P 500 closed the week at  1,961.05, up from last Friday’s close of 1,921.22.  The NASDAQ closed the week at 4,822.34 up from last week’s close of 4,683.92.

Mortgage rates remain around 4%  –  The 30 year fixed rates ended the week around 3.875% for loans up to $417,000, and around 4.00for loans over $417,000.  The 15 year fixed rate loans are about 3.25% for loans up to $417,000, higher loan amounts have rates that are around 3.375%. The 5 Year-ARM rate is around 2.75% and 1 Year-ARM mortgages are about 2.50%. 

Treasury Bond yields slightly higher this week – The 10 year Treasury bond yield closed week at 2.20%, up from 2.13% last Friday.  The 30 year treasury bond yield closed Friday at 2.95%, up slightly from last week’s close of 2.89%.

Important gage of inflation shows no threat  – The Labor Department said that its Producer Price Index wasunchanged in August after gaining 0.2% in July. In the past 12 months ending in August the Producer Price Index has shown producer prices declining 0.8%, the 7th strait past 12 month decrease in the index. This is mostly attributed to lower energy costs due to falling oil prices, and low import costs due to a stronger dollar. It should be noted that while producers of goods and services are seeing prices actually fall a tad, consumers are seeing prices increase. However, those increases are well below the Fed’s target rate of 2%. The Consumer Price Index is index used for consumer’s prices. It will be out later in the month.

Consumer sentiment slips in early September – The University of Michigan preliminary September reading unexpectedly fell more sharply in September to the lowest level in over a year. This is important because consumer spending, which has been strong, accounts for almost 3/4 of the U.S. Economy.  The fear is that when consumers are less optimistic about the economy they spend less. Up to now consumers have been spending at a very healthy level, but if sentiment keeps dropping that could change.

Syd Leibovitch

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