Seriously, don’t count on ever seeing any meaningful interest rate hikes within our lifetime. Or the next one. What follows is a timeline to prove my point. Stick with me on this one, and see if you agree.
2018: Current Federal Reserve Chairman Jerome Powell raises 10-year Treasury note interest rates four times, and signals that he will raise rates four more times in 2019.
The stock market then promptly plunges into the first bear market since the Great Recession. All three major U.S. indexes close the year in the red: the Dow Jones lost 5.63%, the S&P 500 fell 6.24%, and the NASDAQ declined 3.88%.
Trump and Powell: A picture is worth a thousand words. Courtesy: vox.com
12-19-2018: The Fed now projects only two interest rate hikes in 2019 instead of four. President Trump, meanwhile, says, “It is incredible” that “the Fed is even considering yet another interest rate hike.”
1-4-2019: Powell says, “We will be patient as we watch to see how the economy evolves.” Stocks promptly take off like a rocket. (Note the word “patient” – you’ll be seeing that word again.)
1-9-2019: The FOMC meeting minutes say that the Fed can “afford to be patient about further policy firming.”
1-14-2019: Former Fed Chair Janet Yellen suggests the possibility of no rate hikes in 2019: “If there is a downturn in the global economy and that spills into the U.S…. It’s very possible we may have seen the last interest rate hike of this cycle.”
Janet Yellen. Courtesy: npr.com
1-30-2019: The Fed chooses not to raise interest rates. Powell says, “The case for raising rates has weakened somewhat,” and the committee vows to take a “patient” approach toward further hikes.
1-31-2019: The S&P 500 rose nearly 8% in January. It was the best January for the S&P 500 in 32 years, since 1987. (Immediately after the Fed backs off of its rate-hike path. Coincidence?)
2-6-2019: Janet Yellen suggests possibility of rate cuts in 2019: “If global growth really weakens and that spills over to the United States where financial conditions tighten more and we do see a weakening in the U.S. economy, it’s certainly possible that the next move is a cut.”
2-7-2019: The European Union trims its 2019 euro area GDP growth forecast from 1.9% to 1.3%. Global growth slowing is here – the perfect excuse never to raise interest rates again.
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Powell was the first Fed Chair since Paul Volcker to make an earnest attempt to raise bond yields. Volcker raised the 10-year Treasury yield above 15% in 1980; Powell couldn’t even get it to 3% without causing a bear market in stocks.
Paul Volcker. Courtesy: dailykos.com
Besides, the President, like all Presidents since Volcker, didn’t want the Fed to meaningfully raise bond yields.
There will be small Treasury yield increases here and there, but a substantial and lasting rate increase is pretty much impossible now.
The days of retirees being able to avoid the risky stock market and opt for a fairly safe 5% bond investment return that at least keeps up with inflation, is long gone.
Incidentally, Paul Volcker is still alive and well at 91 years of age… and he sees “a hell of a mess in every direction.”
Governments Have Amassed ungodly Debt Piles and Have Promised Retirees Unreasonable Amounts of Entitlements, Not In Line with Income Tax Collections. The House of Cards Is Set To Be Worse than 2008! Rising Interest Rates Can Topple The Fiat Monetary Structure, Leaving Investors with Less Than Half of Their Equity Intact!