Interest rates are going to change...or are they?
The topic on all investors minds is when are interest rates going to change and by how much? In a world of globalization, Brexit, Chinese currency valuation concerns, trade wars, and Trump uncertainty, we investors are trying to gauge just how quickly rates will continue to tick upward.
It is interesting to see the FED vacillate between uncertainty over the economy, and Trump's rhetoric about obtaining 3% GDP growth over the short term.
With Trump and his agenda only as reliable as his Twitter app, who knows what the future holds for the Trump White House. Janet Yellen seems to be hanging on the words of Trump and not the action of Trump. We've heard a lot from Trump about a Wall, higher growth rates in the future, immigration, repealing Obamacare(also known as the Affordable Care Act), and more.
But where do the economic tires meet the road... Let's not forget that when Obama took office there were about 80 million people of working age who were not participating in the labor force, this number now stands at about 95 million workers not participating in the Labor Force. This is the highest number of Americans not participating in the labor force in the last 35 years and it's a record. Rate hikes are often conducted to slow an overheating economy, to pull money out of the economy and to slow growth and inflation expectations.
But if the economy was truly overheating with rising wages and with a low unemployment rate, wouldn't the labor force participation rate be improving and not deteriorating? Wouldn't higher wages draw idle workers back into the workforce? Since Obama became President, the Labor Force participation rate has been deteriorating and not improving.
Yet another sign of economic fragility comes from the SNAP program, otherwise known as "food stamps". When Obama took office in 2009 there were 32 million benefiting from SNAP, by 2016 that number had grown to 43 million receiving benefits.
Rates are expected to change in March 2017, but due to our tenuous economic footing I don't expect the FED funds rate to become as parabolic as some fear. So despite the prevailing uncertainties, the progression of rates will likely follow a muted rise as both Yellen and Trump look to prevent an economic relapse.
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