More Downward Pressure for Interest Rates?
By Brad Thomason, CPA
May 19, 2015
Trying to guess where interest rates are headed, I’ve been told my whole career, is a fool’s errand. More to the point in the here-and-now, we don’t have to spend a lot of time speculating about low rates in the future, because low rates today are already a fact.
Some people though still look to a time when rates will rise again, and bonds and CDs will go back to providing a meaningful return on capital. If those folks have been seeing some of the news items I’ve seen over the last few weeks, I’m afraid they are just as dismayed as ever.
The general economic data that’s coming out points more and more toward a slowing economy. The economic recovery that we’ve had over the last few years has probably not had the psychological uplift that it normally would have had, in part I think because news coverage has focused so much on the fact that the average family isn’t feeling much of the effect. Owners of the means of production always stand to gain more than laborers (which is the central underpinning for the argument to start a business in the first place), and usually do in rising economic conditions. This is a truth which has not changed since the earliest of times (think about those biblical guys with the great big flocks of sheep). But the way we talk about it from episode to episode matters, and this last time around it was cast as a non-recovery since the only people who made any money were those nasty old business people.
When you start the day with a recovery that the general populace didn’t feel good about in the first place, then you heap on some data that shows it’s slowing down, malaise is the predictable result. Rate hikes in the face of malaise become less probable.
Then there’s the pricing problem. A number of large banks here and elsewhere have decided that the privilege of holding onto big deposits just to give people a place to park their cash isn’t really much of a business model. A number of European banks have already started instituting service fees on large deposits: instead of paying you to let them use the money (in the form of interest on CDs, etc), they now charge you for warehousing services.
This inversion in the flow of funds is being referred to as negative interest, and if you Google that term you’ll find plenty to read. I saw an article the other day that said JP Morgan had joined the party, and was now trying to shed as much as $100 billion-with-a-B in what it considered “excess deposits” because they don’t want to be responsible for them or pay things like FDIC insurance that they’re obligated for if the money is in their bank
.
What’s that got to do with interest rates? Well, if the choice is to earn a small rate on a Treasury or pay a fee to leave it in the bank, what do you think most CFOs are going to opt for? The flow of funds out of foreign and domestic banks almost certainly means that some of that capital will find its way into the bond market. Remember from Econ 101 what happens when demand goes up? Prices do too. Bond prices move in the opposite direction as yields. Higher prices means downward pressure on interest rates.
So I ask you, thoughtful reader: if the Fed isn’t going to raise rates for economic reasons, and market forces are pushing them lower too, where is the much-hoped-for rise supposed to come from?
Rates are already low today. So low that they probably don’t meet the income or growth needs of most individual investors, already. That alone should make most think about whether or not a reallocation is in order.
Still, there are those who ignore the present in the hopes of a better tomorrow. I’m not going to make any hard predictions about where rates are heading. But it’s hard for me to see how they move a lot higher anytime soon, unless something – and maybe a lot of somethings – changes by quite a bit.