At the conclusion of each Federal Reserve meeting, the seventeen committee participants release the results of their latest poll. Each participant’s opinion as to where interest rates will be in 2015, 2016 and 2017 is represented by a single blue dot on a graph.
In recent memory the current year dots have all been hugging zero, a reality not lost on anyone with a savings account. But in the most recent poll the dots suggest near-term ascension. The dispersion is wide, but the median expectation for the federal funds rate is roughly 1.75% in 2016 and 3% in 2017.
There are three notable takeaways:
- The date of “lift-off” from the long-standing zero interest rate policy has been subject to countless delays. The timing has been debated on cable news networks ad nauseum – as evidenced by the wear to the mute button on my office remote. Therefore a healthy skepticism for a rate hike at this juncture is warranted. Nonetheless, if the Fed is to have any credibility whatsoever, rates should finally start to drift higher absent a calamity.
- In the event higher interest rates come to fruition, markets will need to adjust accordingly. The prudent investors we serve have long recognized the most likely implications of higher interest rates and have positioned their investments in anticipation.
- While the long-awaited initial rate increase will garner all the media attention, we are reminded that the timing is largely immaterial. Instead, the meaningful question for your investments is the pace of future increases and where rates eventually settle.
It is my opinion that the process of raising interest rates to the Fed’s longer-run expectation of 3.5-4% will be slowed by a host of previously cited and to-be-named excuses. While “normalization” of interest rate policy is still beyond the range of visibility, some progress appears imminent.