The Fed's $64,000 Question: To Hike or Not To Hike?

If you are buying a home you are loving the historically low interest rates offered at banks right now. But, if you are a saver with traditional accounts like CDs and money market accounts you been punished with near zero returns on your money in this environment.

For investors, in the low interest rate environment, double-digit returns have been hard to find in stock and bond investments. Gold has shined in 2016 and remains up 19% on the year as of Oct. 19. The yellow metal has backed off its earlier high, but remains a top performing asset this year.

At the start of 2016, Wall Street was bracing for three or four interest rate hikes this year. As of October none have been delivered. The Federal Reserve pulls the levers on the nation's interest rate policies and the benchmark fed funds rate remains at a nearly rock bottom level of 0.25-50%.

The Federal Reserve has been flipping back and forth all year long. But as of October it has done nothing. What's the problem?

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Federal Reserve Chair Janet Yellen and her team have been hamstrung by various economic concerns this year, which have prevented interest rate increases.

What's Holding The Fed Back?

  • Sluggish world-wide growth and concern about the impact of outside shocks like weak Chinese growth and Brexit on the U.S.
  • Below-trend inflation in the Fed's favored gauge the Personal Consumption Expenditure (the Fed has a 2% target for inflation)
  • Below-average growth here in the United States

Many small business owners know firsthand that while the country is officially in an expansion phase, current levels of economic growth remain below the more normal 3.5% rate or even higher. The U.S. is on track to deliver GDP growth around 1.5% this year.

One perspective is that the Fed's inability to raise interest rates is actually a worrisome signal for the U.S. economy it means that central bankers don't believe the economy is strong enough to withstand a minor bump up in interest rates.

An 8-Year Hangover

This problem remains a hangover from the 2008 global financial crisis, when the Federal Reserve lowered rates to near zero to prevent another depression. While that was 8 years ago, the economy still hasnt fully recovered.

The Fed wants to "normalize" interest rates and bring the fed funds rate to a more historically normal level in the 3.5% or so range. But, weak economic conditions across the country have held the Fed back. They don't want to rock the boat and tip the economy back into recession.

There are still two more chances for the Fed to hike interest rates this year.

Fed Meeting Dates - Mark Your Calendar:

  • November 1-2
  • December 13-14* includes a post-meeting press conference

The November meeting is seen as a non-event as it lies a week ahead of the Presidential Election. The Fed is unlikely to rock the stock market's boat a week before the vote. That leaves all eyes on the December meeting.

Watch Market Views In Real Time

If you are curious and want to follow the market's real-time thoughts on the odds of a rate increase use the CME Group FedWatch Tool.

With the fed funds rate currently at 0.25-0.50% --the CME FedWatch tool shows that the market has priced in a 60% chance of a rate hike at the Fed's December meeting. See the chart below.

CME Group

What Does This Mean For Gold?

Traditionally, a rising interest rate environment is seen as negative for gold. But, it is important to view the Fed's abnormally near zero interest rate levels in perspective.

Key Point: Even if the Fed does hike rates by a quarter of apoint in December the official rate will still be below 1.00%!That is extremely low by historical standards and is not asignificant barrier to continuing gains in the gold market.

How High Can Gold Go Now?

Many Wall Street firms remain bullish on the outlook for gold. Credit Suisse in an Oct. 13 research report reiterates its positive view for the metal with a forecast of +$1,400 per ounce in 2017. They add that they believe the $1,500 per ounce level will be tested in 2017.

Positive factors for gold include:

  • Wealth preservation is driving coin and bar demand gold is increasingly seen as an alternative store of wealth outside of bonds and cash.
  • Central bank purchases of gold
  • Gold miners aren't able to keep up with demand

Is Your Portfolio Properly Hedged?

Spot gold is trading around $1,272 an ounce right now. The recent retreat offers value-conscious buyers a better buying spot. If you are looking to add to your gold position, now is the time to do it. Act now before gold prices move higher again.

Call Blanchard now at 1-866-764-9135. Our portfolio managers are happy to discuss your unique and individual situation with you. Take action now before the presidential election. This might well be the lowest price that gold trades this year.