by Steve Conard, CFP®
I recently heard a speaker only half-jokingly state that “economic forecasting exists to make astrology look respectable”. One need only look at interest rate forecasts over the last 6-7 years to lend credence to this statement. The conventional wisdom among forecasters has been that rates have nowhere to go but up since the recovery from the Great Recession began in 2010, but they have barely budged by any measure over a half-decade.
The Fed uses interest rates to control the money supply, with the ultimate goal of enabling economic growth at a pace that will create full employment without high inflation. The Fed would argue that its zero-interest-rate-policy (ZIRP) has succeeded in lowering the unemployment rate from 10.0% to 5.1% over the last five years, with 2014 inflation of just 1.6% and 2015 barely above zero – so low that the Social Security Administration is not expected to make any cost-of-living adjustment to benefits in 2016. This is only the third time this has occurred in the last 40 years.
Critics of the Fed’s monetary policy cite factors including distrust of government statistics, rewarding borrowing while punishing savers, creating mal-investment in the economy, and a hidden agenda of pacifying Wall Street traders among the ills wrought by ZIRP. The Fed has no Congressional mandate to set policy to accommodate financial markets, and is now in a corner where the markets won’t like whatever it decides to do.
If the economy is indeed solid, moving off ZIRP will induce a Wall Street tantrum as it has whenever the market has sensed the Fed drawing closer to taking action over the last few years. Traders fret that the end of free money also spells the end of the corporate stock buyback binge responsible for moving stocks to new record highs. On the other hand, holding ZIRP in place will fuel fears of a new recession and foster yet more volatility.
There is an emerging camp that believes the Fed has no intention of raising rates, but doesn’t want to spook the citizens or the markets. Raising rates would not make money tight, only less loose, and the Fed would like more leeway to handle the next crisis that comes along. But its actions indicate an obsession with deflation, not inflation. And with the national debt at $17 trillion and climbing, can the taxpayers afford higher interest rates?
Steve Conard is a CERTIFIED FINANCIAL PLANNER™ professional with Compass Financial Services, a registered investment advisor with offices in West Des Moines and Adel. Securities offered through LPL Financial, member FINRA/SIPC. Compass Financial Services is not an affiliate of LPL Financial.