If the Federal Reserve holds to its promise, financial institutions might not see interest rates increase until 2014. But that projection is based largely on expectations that the economy will need several more years to recover from the effects of the last recession. It's possible significant economic change could push the Federal Reserve to reconsider its hold on interest rate increases.
With the economy in flux, investors can't afford to ignore how these changes might affect the performance and value of their assets. Here are six signs that could indicate an interest rate increase is on the near horizon.
Consistent, Overall Economic Growth
Ultimately, all other economic factors affecting the federal interest rate can be grouped together under the umbrella of economic growth. To put it in the broadest terms, the Federal Reserve is going to wait until there are strong indications the economy is on sound footing before it considers increasing interest rates.
After the 2008 recession, the Federal Reserve dropped interest rates close to 0% to help stimulate the economy in several ways. One notable effect was lowering the value of the dollar to encourage consumers to buy American goods instead of foreign products, with the added goal of increasing employment and workers' wages. Once the economy rebounds and positive economic growth is seen, the Federal Reserve will increase interest rates to stabilize the economy and prevent inflation.
More Job Creation, Fewer Unemployed
The unemployment rate in the United States continues to be problematic and although there is some job growth occurring in certain industries, the improvements haven't been consistent enough to make a sustained impact on the economy. Positive job creation reports indicate American businesses are recovering, turning profits, and employing more workers — necessary steps to reduce unemployment. Expect to see significantly reduced unemployment and more optimistic job forecasts before the Federal Reserve changes interest rates.
Increased Consumer Spending
In a recession, consumer spending drops considerably in luxury markets, including areas such as tourism, entertainment, and even clothing. The federal government employed strategies like a national tax credit to provide consumer incentives to spend more money and give the economy a boost in the right direction. Although those efforts have seen positive results, consumer spending has yet to return to pre-recession levels.
The tourism industry will serve as a good barometer of the economy's health as a whole. When this industry fully recovers, so has the economy and it will be a strong sign that interest rates may be affected.
Real Estate Recovery
Housing market issues that preceded the 2008 credit crisis are still being felt. Real estate in general is still recovering from the fallout, with many homeowners struggling to stave off foreclosure and devalued property. Although it's an attractive market for home buyers, interest rate hikes prior to a full recovery would have a pronounced impact on values. As a rule, the Fed monitors the performance of real estate before taking action.
Improved Stock Performances
The stock market might be buoyed by lower interest rates but it tends to take a dip when the Federal Reserve increases interest rates. When the Dow Jones, NASDAQ, and other markets experience consistent growth over a prolonged period of time, it will signal the Federal Reserve that investment assets are recovering from the recession and it might be safe to increase rates.
As consumers take more advantage of the financial opportunities created at their credit unions and other financial intermediaries, the Fed will begin to assess its other mandate: stable prices. If the economy starts to overheat, the Fed will attempt to stave off any inflationary pressures by raising rates. Loans are currently more affordable because of the lower interest rates, but increased consumer activity will signal to the Federal Reserve that the economy can handle a rates increase.
These signs are all largely out of the control of the investor. As you monitor these developments it is a good practice to keep many options available for your balance sheet and portfolio. One of the investment options available to credit unions is the Trust for Credit Unions. Trust for Credit Unions portfolios were created specifically for cooperative financial institutions. Although the investor cannot control these developments, but only respond, TCU offers next-day settlements so the investor has the control and flexibility to more quickly respond to changes in the market.
To learn more about the TCU Fund family, visit the Trust for Credit Unions website.
The Trust for Credit Unions (TCU) is a family of institutional mutual funds offered exclusively to credit unions. Callahan Financial Services is a wholly owned subsidiary of Callahan & Associates and is the distributor of the TCU mutual funds. Goldman Sachs Asset Management is the advisor of the TCU mutual funds. To obtain a prospectus that contains detailed fund information including investment policies, risk considerations, charges, and expenses, call Callahan Financial Services, Inc. at 800-CFS-5678. Please read the prospectus carefully before investing or sending money. Units of the Trust portfolios are not endorsed by, insured by, obligations of, or otherwise supported by the U.S. Government, the NCUSIF, the NCUA, or any other governmental agency. An investment in the portfolios involves risk including possible loss of principal.