One day its fine the next it’s black; So if you want me off your back; Well,
come on and let me know, should I stay or should I go…The Clash, one of the original punk rock bands from the 1970’s whose verses are ringing through my mind. When I think of the UK and BREXIT or the Fed and interest rates, this catchy verse “Should I Stay or Should I Go” is so fitting. Just the name “the Clash” reverberates the tailwinds and headwinds the financial markets and economies are in right now.
On Friday, tomorrow, the Federal Reserve Chairman Jerome Powell and the
Federal Reserve will decide and announce whether they should lower interest rates.
The Federal Reserve runs the Central Bank and sets policy decisions to lower or
raise interest rates in the U.S. Use of interest rates to slow down inflation during
times an economy expands too fast and inversely, in the face of slowing economy
or recession, lowering interest rates stimulates the market. After raising rates in
December, the Reserve has been under increasing pressure to lower interest rates.
The Central Bank has gone from “a long way to neutral” to, “act as appropriate to
sustain the expansion.” So, should they stay or should they go and lower rates?
Right now, the market only has less than a 30% chance the Fed will lower rates in June, however, the July probability is at a firm 85%. With the G-20 summit coming the end of the month and the Reserve not yet willing to admit the December rate hike was a mistake, are among the top reasons why they will stay.
The data though is pointing strongly that their goals of inflation and employment of prime-aged workers are nowhere near being accomplished. Rates being raised too high or too quickly has a negative impact resulting in a slowing of an economy.
It appears this is the story that the data points the Fed’s follow are painting.
Okay, what does all of this economics lingo mean to an investor and their money? It’s simple. You see what your money market pays your idle cash in checking, savings, or brokerage account is in direct correlation to what the Fed’s do with interest rates. Or on-line and in the bank, you will see banners promoting what the certificate of deposit (CD) rates are. They always have a decimal out to a hundredth. When the Reserve lowers rates those signs go down to only paying you the hundredths and no numbers in front of the decimal. Rates going up start to show pretty good numbers in front of that little dot.
This is where you need to become familiar with fixed income and for what term to buy a bond or CD for, longer or shorter. Again, think about it.
It is the opposite of how you would want to borrow money. How would you match up how
long to lend money based on how well it paid you? If the Central Bank starts to lower interest rates you will no longer be able to lend at the higher interest rate you were just able to last time you invested. When rates start to drop a portfolio should move out of short-term interest rate positions and into longer-term positions to lock in the higher rates. How long is determined by your need of liquidity and the risk and return that’s right for you.
Right now, economists and analysts have forecasted and the market has priced in a rate drop by 0.50%. Consider maturing CD bonds, fixed income mutual funds or ETF into at least a little longer-term option. This will stay any downside in interest rates and keep your income from going. Be ok with yourself if they stay or go. Enjoy the Clash and remember black is better than red when it comes to portfolio performance numbers.
Andrew F. Kotyuk, CIMA* is CEO and Principal of Alpha Wealth Management
LLC, send questions or comments to [email protected]