Before you waste your time reading this let me start off by saying that I just floated the interest rate on a 36 month business loan rather than fixing the rate. Most of you probably think right now that I am crazy! Rates are going up…right?
Any TV New Channel worth its weight in salt would fire a weather forecast team if they were as inaccurate as the very best Economist! As such you should not take much value to anyone that claims they know exactly what is going to happen in the economy, and when. As an economist we like to give vague answers like, on one hand, or on the other hand… but listen close, I will give you the best economic forecast you will ever get from an Economist…prices will go up, prices will go down, rates will go up, rates will go down. I can guarantee that the forecast I just gave to be right, however, I can’t tell you when, or in what order those things are going to happen.
Here is what I can tell you, I just finalized a loan for one of the businesses I own, and I was given a half a dozen options on ways to structure the deal, and here is what I did…I floated the rate for the next 3 years at Prime + 0! If you follow the market, listen to financial news, and read things from Economists you probably think that rates will be going up. I do not disagree, rates will go up…but like I said, when?
Here is the deal, Jane Yellen has offered plenty of rhetoric about normalization of the interest rates, but it is not going to happen anytime soon, and if she does raise rates in the next 12 months then the last thing you need to worry about are interest rates, as you will be too worried about the total global meltdown to care about that extra quarter or half point that you will be paying on a loan.
If the FED does rise when will it be? June and July are out, there is no way that we can hit Yellen’s inflation target by then. September or October? The markets are too weak in the fall, this is traditionally when we have market crashes. We are already building up for a major equity reversal, if the market reverses before either meeting then she can’t raises, and if the market has not crashed by then it will be painfully obvious that the market will be correcting soon, and the last thing the FED wants on their hands is a market crash shortly after a raise.
The next option is December, and as you can tell I am a Bear so I don’t see it, but I will use some of my Economist “on the other hand” talk, and if equity markets make it to November without a major correction this is the meeting that we could see Yellen call for an increase.
We all “know” that the FED does not answer to the Office or the Presidency or the Legislative Branch, but there is no way that the FED is going to do anything to rock the boat in 2016 during an election year, so just put that out of your mind. So I am in the camp that 1.) We will likely see a reversal in the markets late in 2015, and 2.) If we do not have an equity reversal then nothing will happen in 2016.
On the other hand, if we don’t see a market correction the FED could tighten in 2017, however if they don’t have the guts to raise during an election year, they are not doing to raise during the first term of the new President. Look at the chart above, if Yelling does not raise at the December meeting, we can’t get our inflation and GDP numbers to hit where we need and wean off the QE and Bond Buying madness fast enough to start seeing a good Economic case to raise the FED Funds Rate until 2020 or 2021. So here is some Economist logic for you, slim chance for increase in Dec 2015, maybe in 2017, but most likely it is smooth sailing for rates until 2020.
So the only real reason anyone actually listens to Economists instead of publicly hanging them in the town square is because their research and “forecasts” affects us in the one way we care about…the wallet. So for all of you that are looking at short term rates (under 5 years) go ahead and let them float, and for those of you that are looking at long term purchases (over 5 years), well rates will go up, and they will go down, but with rates as low as they are you may as well lock them in, but don’t be surprised to see a major market correction and/or another 5 years of rates at next to nothing.