If you’re a parent, like me, you always tend to be more suspicious when your children are quiet than when there is the typical running through the house and sibling bickering. Of late, there seems to be little news on what we can expect on the interest rate front which makes me wonder what is to come. Next week we can expect a Federal Reserve update as well as Housing and Inflation data, which should provide some good direction.
Back in July, the Fed signaled its intent to dial-back Quantitative Easing (QE), an aggressive U.S. Treasury and Mortgage Back Securities (MBS) buying program designed to boost the U.S. economy. This reduction in purchases indicates the Fed’s confidence that the economy is improving. Yet when discussing rate stability previously, the Fed used the term “considerable time” to indicate the current rate levels would continue. So which is it? Are we moving in the right direction or are things unstable? Realistically, it’s probably a bit of both. While the economy is moving out of the “crisis” zone, it’s still not stable enough to withstand significant movement on the rate side. All will be listening to see if the “considerable time” term is used yet again or if notably absent-which would indicate the time for rates to move upward is upon us.
While we are in a holding pattern around rates, the Fed announced last week the creation of a new Financial Stability Committee, led by Fed Vice-Chairman Stanley Fischer. After the 2007-2009 financial crises, the Fed appears to be trying to get in front any other financial fiascos that could emerge. Since joining the Fed in June, Fisher has spoken about the need to put safeguards in place to cool down markets that have the potential to crash and burn.
I believe the Fed is looking to improve financial market safeguards in anticipation of an upwardly moving economy. While I don’t think significant rate increases will be upon us anytime soon, at some point the rates will have to go back up as the U.S. economy recovers. The wild cards? The numerous world events around us including the current IS conflict, Russian/Ukraine relations and the implementation of QE by the European Union to help lower rates and boost business/consumer activity across the continent.