Interest rates are currently at historically low levels and will likely go up at some point in the future. The question is — when? Our Senior Interest Rate Specialist Zach Pandl offers some insight on the key factors influencing rates:
Concerns about economic growth remain in the spotlight. Given the current levels, can you comment on what it means for interest rates?
A number of questions and anxieties make for a cloudy view of U.S. economic growth. Growth has remained weak despite efforts by Congress to stimulate the economy through fiscal policy measures. While these measures likely helped end the recession and stabilize the financial system, they have not been enough to ensure more rapid growth.
Looking forward, government spending cuts and tax increases should work heavily against increasing economic growth. With U.S. growth rates forecast in the 2% range for 2013, we expect that policymakers will attempt to keep interest rates low, yet rates will remain vulnerable on the upside to any positive economic news.
Could sustained improvement in unemployment figures move interest rates higher?
Weaker-than-expected job growth in the U.S. has dimmed the labor market outlook and is a critical factor behind the low interest-rate environment. Even with plenty of cash on hand, concerns over an uncertain business outlook are stressing corporations and influencing hiring decisions. Sluggish employment gains give policymakers reason to support initiatives aimed at keeping interest rates low. In fact, the Federal Reserve has expressed its intent to keep interest rates low until the unemployment rate reaches 6.5%. However, a trend of falling unemployment figures would signal an uptick in corporate confidence and support growing consumer spending, which in turn would likely lead to rates moving higher over time as demand for credit rises. Accordingly, if the unemployment rate falls faster than expected, the low interest-rate environment could come to an end more quickly.
Are there any wildcards that could also influence interest rates?
In a word: Europe. The financial crisis in Europe remains a major threat to global growth. If European governments fail to resolve the crisis, it could continue to weigh on the economy, which would keep interest rates low.
What are the implications for fixed-income investors in today’s low interest-rate environment?
We know that interest rates are at historical lows and have more room to move higher than lower. Fixed-income investors may want to take on less interest-rate risk with shorter term bonds, as longer term bonds generally carry more downside price risk in a rising interest-rate environment. As always, investors should consult with a financial professional to determine how to best pursue specific investment goals.