Where are Rates Headed?
Record low unemployment, consistent job growth, steady consumer confidence numbers...all of these would lead one to believe the economy will continue to be robust and no stimulus is really required. On the flipside, the trade war with China appears to be escalating, which theoretically could create higher priced consumer goods and inflation. The Fed did make a 25bp cut last week, but wasn't this really to reverse the increase that probably shouldn't have happened in December? Confused yet?
The best indicator historically has been the Treasury rate curve. When it becomes inverted (i.e. long-term bonds are cheaper than short term bonds), a recession occurs in the next 12 to 24 months. This occurred earlier this year, which would indicate we are heading towards some kind of economic correction. This will likely prompt discussions about more rate cuts, but the Fed has stated its long-term goal is to maintain Fed Funds at about 2%, and they are at roughly 2.25% right now. We could be in for another period of stagnant rates, which might just be a good thing. Mortgage rates are very low, real estate prices and activity are strong and the biggest complaint of local businesses is a lack of workers.
I would be foolish to forecast rates at this point, but I would recommend that individuals or businesses not let the current interest rate environment alter sound financial decisions. If you are considering an expansion or haven't looked at refinancing your home in a few years, move ahead if it makes sense. Whatever happens, rates are currently very low and historically the cost of capital has been much higher. This is not a time to abandon good business sense and get over-leveraged, but most projects will have a much quicker payback in this environment.
By Stephen J. Tramp, President and CEO