Given how long interest rates have remained low, the question in the title of this blog is a question that I hear quite often. Unfortunately, there is no absolute answer to that question. As of yet, no one has developed the magic crystal ball that will give us the date and time that rates will begin a sustained increase versus the up and down pattern that has existed over the last 18 months.
My counsel: listen to the Federal Reserve.
It is important to understand that interest rates (both short maturity and long maturity) are where they are because of the actions of the Federal Reserve. The Federal Reserve has actively pursued a strategy that has become known as “financial repression”. This simply means that the Federal Reserve is suppressing interest rates in an effort to stimulate the economy. So, if you want to know when interest rates will rise, understanding what the Federal Reserve is planning and what they are communicating is important.
Before Ben Bernanke took over as Federal Reserve Chairman, trying to understand what the Federal Reserve was doing and saying was an art form. Current Federal Reserve Chairman (Janet Yellen) has continued Chairman Bernanke’s communication style. One thing that is different now, compared to the past, is that they are making every effort to communicate effectively and be more transparent. Everyone has their opinion as to how successful they have been, but the fact remains that they are communicating more and with more clarity than before.
The Federal Reserve’s Federal Open Market Committee (FOMC) met this past Tuesday and Wednesday (9/16-9/17) and issued a press release as well as held a press conference at the conclusion of the meeting in order to communicate the decisions that were made. The “Cliff Notes” version of what they said was: “We are getting closer to raising interest rates, but we do not plan to raise them yet”. The details from their press release and the comments from the press conference identified that the Federal Reserve anticipates that the first increase in their short term interest rate (Fed Funds) is expected to occur in the middle of next year, as long as the economy continues to improve. The Federal Reserve specifically communicated that they believe the employment situation needs to continue to improve and inflation expectations need to continue to remain stable. A significant improvement in the employment situation or a significant increase in inflation expectations would probably cause the Federal Reserve to raise rates sooner. If the economy starts to slow down or inflation expectations start to decline then the Federal Reserve would probably delay raising interest rates.
As for those who want to know when interest rates will rise because they may be trying to time when to lock in a mortgage rate, I would simply remind you that today’s mortgage rates are near historic lows. The key questions you need to answer if you are playing the waiting game are:
1) What is the difference in monthly payments at various interest rate levels? There are plenty of financial calculators on the internet that can provide this information.
2) Where is your “regret” level if rates go up and you did not get the lowest rate possible?
Answering those questions for yourself will help you keep the “when to lock in” question objective rather than emotional.
Steve Scranton is the Chief Investment Officer and Economist for Washington Trust Bank and is a CFA charter holder with over 30 years of investment experience with equities, tax-exempt and taxable fixed income securities. Steve actively participates on committees within the bank to help design strategies and policies related to client and bank owned investments. Steve also serves as the economist for the Bank and has been a featured speaker for both client and professional organization events throughout the Northwest.