Arbor Wealth: Crisis du jour, rate hike and Louis Armstrong
“I hear babies cry … I watch them grow;
they’ll learn much more than I’ll ever know.” — from “What a Wonderful World” as performed by Louis Armstrong
Flash back to the Y2K scare. The fear was that as we transitioned to a new century on the eve of Dec. 31, 2000, technical issues related to computers would overwhelm us. Businesses hired Y2K consultants to prepare for, monitor and deal with the expected technology crisis.
Some experts predicted that markets might be impacted and that trading could be halted or interrupted. The history of personal accounts was at risk, according to some, who feared that even tracking earnings and stock histories might become impossible. When the ball dropped in Times Square, though, computers converted nicely to the new year and the new century, and the economic impact was minimal.
Similar fears accompanied the potential rate hike by the Federal Reserve. Talk of what it would mean to markets dominated the airwaves ad nauseam. Then, as you know, on Dec. 16, the actual rate hike occurred … and the sun came up on the 17th. The Federal Reserve Board’s statement included the following broad but rather innocuous language: “…there has been considerable improvement in labor market conditions this year … the Committee decided to raise the target range for the federal funds rate to one quarter to one half percent.”
True, our economy is not yet out of the woods. The rate of inflation has not risen to the Fed’s desired two percent level. Our middle class continues to shrink. High premiums, more out-of-pocket costs and higher deductibles are creating a financial hardship on Americans who purchase private health insurance. Globalization, automation and robotics decrease the number of high paying jobs.
A near zero target range for the federal funds rate was established in 2008, as part of the Fed’s attempt to revive an economy reeling from the Great Recession. And it took seven years for the Federal Reserve to raise the rate by even a tiny increment. That said, the rate hike is a good sign that our economy is strengthening.
Truthfully, it’s not a large increase. And secondly, the federal funds rate is likely to remain low for an extended period of time. Businesses and individuals that borrow money will likely do so at an extremely attractive rate for quite a while. When we purchased our first home in 1983, I remember paying a mortgage rate well north of 10 percent. Today many home buyers can borrow money for a third of that rate.
Even with U.S. markets off to a rocky start in 2016, virtually all developed nations around the globe would gladly trade places with us. We’ve got the cleanest dirty shirt in the world economic laundry. We’re raising rates, while Europe and Japan are likely years away from being able to follow suit.
Margaret R. McDowell, ChFC, AIF, a syndicated economic columnist, is the founder of Arbor Wealth Management, LLC, (850-608-6121 — www.arborwealth.net), a “fee-only” registered investment advisory firm located near Sandestin. This column should not be considered personalized investment advice and provides no assurance that any specific strategy or investment will be suitable or profitable for an investor.