Current Thinking

Higher Interest Rates-Is History a Guide? A Follow-Up

A blog by Frederic Slade, CFA, Assistant Vice President and Senior Director, Investments, Pentegra Retirement Services – January 19, 2016

In my July 2013 blog, “Higher Interest Rates-Is History a Guide?”, the United States economic and capital markets environment was projected going forward from that date. It is interesting to see how the recent markets compare with the outlook in the 2013 blog.

Highlights from the 2013 piece included the following:

Interest Rates: Could gradually rise over time, with lower rates in interim periods, and the 10 year Treasury yield around 2.5%. This projection was partially accurate. Between mid-2013 and the present, the 10-year yield varied between 1.7% and 3.0% with an average yield of 2.2% over this period. However, the rise in yields ended at the beginning of 2014, with interest rates plunging and reaching a low of 1.7% in February 2015. The current 10-year yield is 2.2% but could rise further if there are additional Fed rate increases in 2016.

Fed monetary policy will be accommodative, with easing and short term rates near zero. This projection has generally held true, as the Federal funds rate has remained low and held constant until the recent 25 basis points increase.

Inflation will stay low (less than 2%), with much less dependence by the United States on imported oil. This projection has generally held true. Inflation, as measured by the Consumer Price Index, has generally remained well under 2% and more recently has been close to zero.
According to the Energy Information Agency, the percentage of United States net imports of petroleum declined from 33.5% in July 2013 to 23.8% in November 2015. In addition, Unites States energy production and supply have continued to increase, with United States crude oil production increasing by 29% from June 30, 2013 to October 31, 2015.

Economic growth will be moderate (2%-2.5% annually). While, on average, United States Gross Domestic Product has grown at a 2.5% annual rate since mid-2013, there has been a significant amount of quarterly volatility in the growth rate, ranging from -0.9% to +4.3%.

Capital Market Returns Will Be Generally Positive. While large cap stocks have generated positive returns in 2013, 2014 and 2015, small cap and international stocks have been volatile, with negative returns in 2015. Fixed income returns have been mixed.

As with most projections, actual results have differed depending on the market focus. However, these comparisons can provide valuable information for future projections.

NOTE: Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities. Past performance is not a guarantee of future results.


About the Author

Frederic Slade

Frederic Slade is Assistant Vice President and Senior Director, Investments at Pentegra Retirement Services. He joined Pentegra in May 2007 as a Senior Analyst in the Investment Department and became Director-Investments in January 2013. He is responsible for managing over $1 billion in internal bond portfolios and providing asset/liability studies, analytics and product strategy for Pentegra’s Defined Benefit and Defined Contribution Plans. Mr. Slade is also a frequent contributor of economic and financial market blogs to Pentegra’s Talk to a Specialist website and the financial media. Prior to joining Pentegra, Mr. Slade was a Senior Quantitative Analyst at Citigroup Asset Management, providing asset allocation and quantitative stock screening for mutual fund products. Prior to Mr. Slade’s tenure at Citigroup, he was an Investment Manager at NYNEX Asset Management (now Verizon). At Verizon, Mr. Slade was responsible for asset allocation and planning for its $15 billion Defined Benefit pension fund. Mr. Slade holds a Ph.D. in Economics from the University of Pennsylvania and a CFA, and is a frequent presenter at industry seminars and conferences.




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