Moderating Economy or Downturn Preparation?

While economists and financial experts seem to be in basic agreement about the projected number of rate hikes we should be expecting, there appears to be two schools of thought as to the Fed’s reasoning for hiking interest rates. A recent Reuters poll surveyed 103 economic experts. When asked what factors contributed to federal rate hikes, 40 percent said they believed it was to cap future inflation, while nearly a third believed the Fed is padding for a market downturn.

What Federal Rate Hikes Mean for You

Most experts agree on projections that the Fed will bump the current rate by 25 basis points, raising the current percentage from 1.25 to 1.50 percent. At the current pace, federal interest rate hikes wouldn’t hamper economic growth. There’s still room to grow and we’re still a comfortable distance from pre-recession levels. If you’re wondering how the expected rate hikes are going to be affecting your day-to-day, you probably won’t see too much change. As with any interest rate hike, savers benefit from increased higher interest rate returns,while spenders will find themselves paying higher rates on credit cards and loans.

“Do no harm”

The phrasing Dudley used in asking Congress to preserve key regulations underscores the imperatives of the measures he his trying to preserve. Many of the core financial regulations in place today are a direct result of the 2008 crisis – which was itself a direct result of lack of sufficient regulation and oversight. The effects of the financial crisis were far-reaching and deep. We all experienced the negative effects and there are still people trying to recover what they’ve lost. It’s been a slow climb back to stable levels, but our economy is rebounding and investor activity is healthy; in fact, Wall Street indices have reached record highs over the last year. A return to normalcy could not have been achieved without the financial regulations put in place following the crash. While it seems that a review and potential overhaul of current measures is likely, eliminating the regulations that have helped us recover would not only be unwise, but could actually cause real harm to our economy. Fed experts also warn that financial deregulation can be a slippery slope, leading to massive unwinding of protective measures.

Key Financial Regulations

While Dudley did agree that some current regulation warrants adjustment, the key regulations maintaining a healthy financial industry must remain untouched. Among the key financial regulations, he listed standards upholding stronger capital, liquidity, and clearing must be kept in place.

Is 2008 far enough in our rear-view that we’ve already forgotten the same mistakes that brought the financial industry-and U.S. economy-to the brink of collapse? Evidently, it is for banks and policymakers. You have probably been hearing a lot of talk about impending “reviews” of current financial regulation measures; the very regulations put in place immediately following the aftermath of the 2008 collapse; the very measures that are meant to ensure that kind of thing doesn’t happen anymore. However, these calls for review signal a clear intention for some of a desire for wide-scale financial deregulation.

The Push for Financial Deregulation

Financial institutions have claimed that regulation measures have been retaliatory and have largely resulted in stifling growth and ability to offer competitive services and prices. With the introduction of the Trump Administration, financial stocks soared on optimism of a businessman in the White House. The president and other policymakers have repeatedly voice dissatisfaction with current regulatory measures. Notably, the Dodd-Frank law, which provides much of the overarching regulation for banking and finance, has been seen as headed for the chopping block. Reuters reports that in June, House Republicans voted to replace Dodd-Frank.

In a World Without Financial Regulation

The risks of widespread financial deregulation are great. The fallout of 2007-2009 were universal, and effectively ended the popular “too big to fail” concept. Entire companies were brought down, not to mention the homes and savings of thousands of people and families. You probably know someone who experienced financial devastation. Dodd-Frank and other regulatory measures were put in place to ensure that devastation of the magnitude never occur again. While a review of some measures may be warranted, massive financial deregulation is not. In fact, banking experts are warning that a move like that could have dire consequences. Vice Federal Reserve Chair, Stanley Fischer, recently stated that the decision to roll back key elements of Dodd-Frank were extremely short-sighted. He warned that a reversal could be taking us in a very dangerous direction. Regardless of political preference, nobody wants a return to the dark days of 2008. Any “reviews” of existing regulations should be met with apprehension and should be given full deliberation.

Resources

You can read more about the Fed’s concern over deregulation here. Curious about what potential rollbacks could mean for your retirement savings or investments? Give us a call.

The Federal Reserve has decided to leave interest rates alone for the foreseeable future, according to a report from Reuters. Despite the fact that a target rate-hike was announced last December, the Fed has deferred any increases as part of a long-term plan to reignite the U.S. economy. President of the Minneapolis Federal Reserve, Neel Kashkari, stated that “the U.S. economy has room to grow before it overheats”. Economists have been speculating when the Fed will introduce a new rate increase as recent figures show the economy on a steady, upward growth. National unemployment is currently at 4.9 percent, which many economists agree is a sign of a stabilized economy. They also say that soft inflation rates are beginning to show signs of hardening. The Fed plans to keep interest rates unchanged as a cushion against a possible slowing global economy and in the event of any destabilizing events in the global market.

Aren’t low interest rates a good thing?

Yes and no. Low interest rates encourage consumers to borrow and invest back into the economy. They also insulate an economy against unforeseen financial events. Low interest rates make investing safer, but they limit returns on investments due to such a low annual accumulation of interest. Long-term investments, like bonds, bear incredibly low yields. Low interest rates also push up inflation rates, or the cost of goods and services.

Further Economic Cushioning

On a related note, Reuters reports that Federal Reserve Chair Janet Yellen announced this week that the Fed is considering a change to their annual stress tests, or how the overall economy and U.S. securities will fare in the event of a global financial crisis. Without going into specific commentary on the state of the U.S. economy, the Fed char described a more “risk-sensitive, firm-specific buffer”.