Interest Rates: Up, Down, or Sideways?Submitted by Trace Wealth Advisors on July 23rd, 2019
Much has been made lately of the market’s about-face on interest rates. As many of you know, my belief for some time now has been that interest rates are likely to stay lower for a longer period of time than most anticipate. This is really a function of three factors:
- Stubbornly low inflation throughout the world.
- Poor demographics throughout the developed world (an aging population is deflationary in nature and, all else equal, brings with it lower rates).
- Lower than expected global economic growth (as measured by GDP and PMI surveys).
While these reasons sound rational and my argument has been correct thus far (humble brag!), the real question to ask isn’t whether rates are going up or down but, rather, what does either scenario mean for you?
If rates stay low, you will earn less on your fixed income investments but you will also likely pay less on any debt outstanding. The trade off between the two is important and may require reallocating across your balance sheet if rates move.
On the other hand, if rates increase, you’ll have the opportunity to earn more on your fixed income but your expenses may go higher either through increases in debt payments or inflation pushing your core living expenses higher.
Market forecasters (myself included) spend a fair amount of time trying to predict the path of interest rates. Ultimately this makes for good entertainment and an “I told you so” moment (as I did above) but serves little good in the way of helping you understand what actually matters for you. Through our partnership with eMoney, we can stress test your balance sheet’s interest rate sensitivity and show you some “what if” scenarios in terms of inflation and lifestyle changes.
As always, incorporating these potential changes into your plan and allowing it to be dynamic through time will help you be successful no matter the interest rate environment.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All investing involves risk including loss of principal. No strategy assures success or protects against loss.