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A Peek Around the Corner… Maybe


We have consistently struggled in our efforts to forecast interest rates. We have watched as the U.S. Federal debt has moved from $9.7 trillion and 62% of U.S. GDP to $22.7 trillion and 106% of U.S. GDP in 2019. The estimate for 2021 debt outstanding is $26.7 trillion and 136% of GDP. We assumed that with the significantly higher supply of debt that the cost of financing the debt would begin to increase – that has certainly not been the case thus far.

Unemployment in the U.S. fell from a high of just over 10% in 2008 to a low of 3.5% in February 2020 – it now stands at 10.2%. We anticipated that lower unemployment numbers would lead to higher wages and in turn start to move the needle upward for interest rates. No such thing happened.

Trade wars that traditionally lead to higher priced goods have indeed led to price increases in certain products such as steel and other imported raw materials; but have not in turn caused an increase in interest rates.

What is different this time around that causes reliable markers for interest rate direction to be irrelevant? We have pondered that question for some time and here are some things that are “different” this time around.

  • Energy prices have collapsed and there is an ever - increasing demand and movement to be energy efficient – holding down a source of inflation.

  • Food production on a global basis has gotten better and in turn food price increases have been held in check.

  • Economic globalization and technological advances have pushed prices lower for goods and services – a big cause in holding down wage growth.

  • Increasing governmental debt had become the rage around the world. Fears of debt have been replaced by the demand to “smooth” out economic cycles.

So, what does all this mean for interest rates as we try to peek around the corner and decipher their direction.

  1. Take advantage of the opportunity to re-finance outstanding debt at record low interest rates.

  2. Interest rates stay low for the balance of the year.

  3. An effective vaccine changes everything.

Stay safe and enjoy the end of summer – thank you for the opportunity to work with you.

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