Going Up?
While the Federal Reserve could be close to announcing the first rise in short-term interest rates in nearly eight years, it shouldn't affect Christmas shoppers.
Janet Yellen, chairman of the Federal Reserve, told Congress earlier this month increasing rates in December was a “live possibility” if there are no shocks to the economy.
And about 92 percent of the business and academic economists polled by The Wall Street Journal in November said they expected the Fed to raise its benchmark federal-funds rate, currently at 0.25 percent, at its Dec. 15-16 policy meeting.
The last increase was in June 2006. The rate has stood at 0.25 since December 2008.
“If I were a betting man, I would bet they will raise the rate,” said Jesus Valencia, associate professor of economics in the School of Business at Slippery Rock University. “But it won't be very big, a quarter of a percent or something like that.”
Howie Pentony of Pentony Capital Management, 1284 Perry Highway, Portersville, an investment adviser/fund manager for more than 35 years, welcomes a possible rate hike.
“I am so tired of waiting for the Fed to do something. I'm tired of hearing about it. My view of it is let's play ball. Let's toss it up and see what happens,” said Pentony, who writes a monthly column for the Butler Eagle.
“I wouldn't be surprised at anything that happens, including nothing. Raise the rate and see what happens,” said Pentony.
The immediate impact of any Fed action will be minimal, said David Culp, economics professor in the School of Business at Slippery Rock University.
Culp, said federal funds are essentially the excess reserves that banks lend to each other, and the federal funds rate is the interest on these intrabank loans.
“What the Fed does is sell securities on the open market and dry up the reserves, creating less liquidity in the banking industry” Culp said.
Raising the federal-fund rate makes it more expensive for banks to borrow. That lowers the supply of available money, which helps keep inflation in check.
“The increase in interest rates is actually a good sign. It signals the economy is doing well,” Culp said. “The recovery of the economy means more and more demand and an upward pressure on prices.”
“The Fed increase is meant to head off future inflationary pressures,” Culp said.
The years without an increase were years the economy was faltering, Culp said.“The economy is still facing some headwinds,” Valencia said. “But on the other hand, there is no inflation anywhere. They would prefer to err on the side of caution.”Nor should the expected Fed action have any effect on investors' stock portfolios.“The stock market looks at this small rise as a good sign of a good economy,” Valencia said.Brian Koble, director of research for the wealth management firm of Heffren-Tillotson Inc., which has a branch in Butler, agreed saying, “I don't think that the Federal Reserve raising rates in particularly eventful for the market, good or bad.”“The Fed has already signaled that it is going to raise rates and that has already been reflected in the stock market,” he said.Valencia advised stock investors this is not the time to take their money out of the market.“I wouldn't if I were them,” Valencia said. “Europe will do much better. China won't do any worse. I think this bodes well for the economy.”Koble said that so far for the year the Standard & Poor's 500 stock index is up 3 percent.“While that's a modest gain, many areas of the market have been flat to down, ”said Koble.“The market has not been appreciating at the pace it had before. The gains have been more modest and harder to come by and volatility has increased” said Koble.According to Pentony, “The stock market does well when interest rates are down and corporate profits are up, but that doesn't mean that just because interest rates rise, the market won't do well.”And, said Koble, the average individual investor should keep his money — money needed on a long-term basis — in the stock market.“I'd say stay the course. That's what I am doing with my portfolio,” said Valencia.The federal-fund rate increase could be followed by rises in the interest charged to consumers for such things as home mortgages, car loans and credit cards, Culp said, but he doubts it.“I don't think you are going to see an increase in credit card rates. They are relatively high. And new and used car rates are at historic lows,” Culp said.He said the prospect of slightly higher interest rates on car loans or home mortgages should not be a deciding factor, as yet, in making a major purchase.Pentony said, “If they raise the rates, of course, this will have an effect on interest rates.”But he added a quarter of one percent raise, which is what is forecast, could have negligible impact.Effects, if any, from any Federal Reserve action, Dec. 15 will only have a temporary effect on the economy, according to Koble.Which could be a good thing, if the Fed embarks on a series of rate hikes to put the brake on any inflationary pressures.“From what I've read this is going to be the first of several rate increases,” said Culp. “According to Janet Yellen ... this series of rate hikes will be slower than previous cycles and peak at a much lower level.”
