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Fed-Effects

03/17/2016

Last December, the Fed raised interest rates a quarter-point and predicted they would raise rates four more times in 2016.  I predicted they would not.

Yesterday, the Fed had their first opportunity to raise rates this year and did not.  In addition, they predicted they would raise rates only two times this year, not four.  I predict they will not.  One more increase this year is the most.

Here’s the problem:  increasing interest rates normally increase the value of the currency.  Increasing interest rates here makes the dollar “stronger,” which means goods manufactured by Americans now cost more.  Rising interest rates are not good for exporters.

That assumes the rest of the world is doing nothing.  In reality, Europe and Japan are doing a lot.  They are actually decreasing interest rates, even making some rates negative.  That increases the relative “strength” or cost of the dollar even faster, by making their own currencies cheaper.  That makes it even worse for our exporters.  For example, just this morning, Caterpillar lowered their annual sales forecasts.

In fairness to the Fed, when they announced four increases for 2016, they were not aware of how much monetary easing or interest rate lowering was going to happen in Europe and Japan.

If you are paying a floating-rate on your home mortgage, don’t worry about it.  Your timing is good. Rates are staying low for now.

If you want to book a vacation to Europe or Japan, go ahead, Your timing is good.  The dollar is staying strong for now.

Too bad about the exporters . . . and their employees.

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