U.S. Finance: Where We Have Been, and Where We Are Going

Change in our national economy has begun to affect interest rates for housing for both better and worse

by Richard Hill Adams

After years of great stability and low interest rates, the Federal Reserve Board started to increase the Federal Funds rates in 2017. We will see more interest rate increases in 2018 and beyond. As a friend of mine used to say, “Interest rates will rise and interest rates will fall with intermittent periods of good stability.” That is where we are headed now. The Federal Reserve Board wants room to move in the event we have a recession and they need to be able to lower the interest rates, so they are raising the rates today in anticipation of tomorrow.

We have seen very low inflation. Oil has been as low as $50 per barrel to the $70 per barrel level today. We are seeing an unprecedented return to full employment. The only problem in the employment sector is that we don’t have enough people that are trained for the jobs that are available. Thus, that market will start to slow down, and unemployment will increase.

In a review of Wall Street, we can see that investors have great expectations of profits, and more profits yet to come. However, that will be tempered; Wall Street will not continue to climb as it has in the past. Today, we see retail giants like Sears and Toys ‘R’ Us, with locations around the world, being beaten up and battered in their markets. As we speak, even Wal-Mart revisits their global plan.

There is a new wave coming called the “Electronic Age Consumer.” Amazon and other online companies are the retailers of the future. What does all this mean to us? It means everything is in flux and everything will change. We will see less construction of brick-and-mortar stores, and there will be a lot of buildings being repurposed to alternative uses. Today, we have condos that once were office buildings, with more change to follow.

The bankers are starting to feel the change, too. As an example, Comerica Bank, based in Birmingham, Alabama, and Regions Financial Corp. both lost deposits compared with a year ago. Other banks are adding deposits, but in much lower rates than in recent years. The decision to raise short-term interest rates has had a major impact on the mortgage market, the stock market, and the investment market. The higher rates that are available today in Money Market Funds will lure investors to move their money to the best returns they can achieve with minimal risk. We have seen this before and will see it now as well.

U.S. inflation looks tame, if you remove the housing costs. The Federal Reserve Board continues to review the inflation of services as a key gauge of price pressures, and they may find it pretty robust — until housing costs are removed from the equation. Prices for services rose 2.9 percent in this year through April. However, if you remove the rent component, they were up only 2.3 percent, according to the Consumer Price Index published in April by the Labor Department. Consequently, that removes some of the risk that the Federal Reserve fears: an overheating economy that warrants stepping up the speed of Federal Funds increases, which translates into interest rate increases across the board.

The Federal Reserve Board tries to keep inflation close to its goal of two percent by influencing labor market conditions via interest rates, according to New York Federal Reserve Bank president William Dudley. Goods prices have moved down and have been moving down over the last several years. Consequently, services inflation would have to run significantly higher than two percent for over a year to show a cause for inflation. The Goods & Services real numbers will show that there is no rational fear for renewed inflation.

What will all this mean to us? Less pressure on the Federal Reserve Board to increase the interest rates, moderation of the current interest rates, and more stability. In the first four months of the year, we saw the 10-year Treasury Bill increase to over three percent. However, the 10-year Treasury Bill is now below three percent.

Where will all of this take us? Where we would like to go: a land of stability and reasonable interest rates, housing opportunities, an expanding economy, and jobs and opportunities for everyone that has talent and an education.

Richard Hill Adams is Chairman and CEO of American Realty Capital Advisors. He may be reached at rhadams@arca-money.com 

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