Editor’s note: One of the features of our new daily letter that we’re most excited about is our periodic interviews with experts in fields ranging from medicine to finance. We’ll routinely dip into editor Dr. David Eifrig’s Rolodex so you can hear from some of the top minds in these fields and more.
To start, Retirement Millionaire Daily researcher Amanda Cuocci discusses the Fed’s recent interest rate decision with Stansberry Research Senior Analyst Matt Weinschenk. Matt earned his M.S. in applied economics from Johns Hopkins University and is a Chartered Financial Analyst.
Amanda Cuocci: Thank you for joining me, Matt.
Last month, the Federal Reserve decided not to raise overnight interest rates. Can you break down what this decision means?
Matt Weinschenk: Sure. So, the Federal Reserve has two specific jobs in regard to monetary policy. First, it aims for full employment. Second, it has to keep prices stable. That’s called the dual mandate. The Fed wants to make sure that unemployment is somewhere around 5% or less, and that inflation doesn’t pick up.
The Fed looks at these two factors – employment and prices – when deciding what to do with interest rates.
Right now, we’ve got a pretty good economy and unemployment is pretty low. So the Fed might say, “Maybe we don’t need these low interest rates anymore to boost the economy.” And we haven’t seen any inflation whatsoever. The Fed’s inflation measure is at 0.4% and the target rate for the Fed’s inflation is about 2%.
So there’s no reason to lower rates when there’s no fear of inflation. And the Federal Reserve figures that without the threat of inflation, there’s no downside to keeping rates low and letting the economy heal a little further before worrying about it getting overheated.
So the Fed decided not to raise rates this time around.
Amanda Cuocci: I just read that the International Monetary Fund (IMF) is asking the Fed not to raise rates at least until 2016. If we do raise rates next year because the economy is doing so well here in the U.S., what does that mean for people who are investing, say, overseas?
Matt Weinschenk: The U.S. economy is doing well so far, but obviously China is slowing down, and Europe is having its own troubles.
The other issue is that a lot of companies in emerging markets – like South Africa – want to issue bonds. But they’ll get more people to buy those bonds if they issue them in dollars instead of the South African rand. So a lot of emerging-market companies have debt issued in U.S. dollars, and when we change rates, it affects them.
If you’re the head of the IMF and you’re worried about global growth, you would like low interest rates for longer. You’d like the dollar to stay a little weaker to help those economies out.
Now, the IMF has no official standing, and I would say the Fed doesn’t really care what the IMF thinks. The Fed is singularly focused on the U.S. economy, and has no allegiance to the IMF.
I don’t even know why the IMF felt like they had to say that, but it would be better for the global economy if rates stayed lower. It’s really just going to be decided in the U.S.
Amanda Cuocci: If interest rates do stay low for a little while longer here in the U.S., what kind of opportunities could investors take advantage of right now?
Matt Weinschenk: The most important thing for a typical American to know is that the Fed’s done a great job of controlling inflation. That’s something that we don’t have to worry about. The market as a whole is expecting interest rates to rise, so everything is sort of priced in.
So there’s not going be any big upheaval in the stock market when rates rise. For the average person who’s got a minimal level of knowledge in finance, it’s not something you need to worry about.
When rates rise you’ll earn more on your CDs and your savings accounts, things like that. But if rates are rising, that means the Fed has judged the economy to be doing well, which it is right now.
When that’s the case, corporate profits are rising and sales are rising. That sort of rising economy raises stocks and raises a lot of investments that overpower anything that the Fed’s doing with interest rates.
Rates alone aren’t going to give you an opportunity, but the fact that the economy is strong enough to sustain higher interest rates, that’s what’s going boost your investments, stocks equities, and things like that.
Amanda Cuocci: Some people are a little nervous about China and the U.S. raising rates, but it sounds like here in the U.S., we’re doing pretty well.
Matt Weinschenk: Yeah, we’re doing fine, and if rates rise, that’s going to make the dollar stronger, and then anything you buy that’s imported, which is pretty much everything we buy these days, that’s all cheaper because we’ve got a stronger dollar. It lowers your cost of living.
And China probably isn’t doing as bad as people think. It’s slowing down. It’s going from a rate of 9% growth to 7% growth, which is certainly not the end of the world. Back in August, people were scared. The Chinese stock market went completely crazy. And when the stock market goes crazy, it could harm your economy if people start to lose confidence or if people get scared of things.
But that doesn’t really seem like it happened so much. On the ground, it’s sort of business as usual in China, so the chances of that really affecting the U.S. economy aren’t big. But obviously there’s always different risks out there in the market, and that would be one of them.
Amanda Cuocci: That makes sense. So really our take-away today is don’t worry about the economy right now. Is that right?
Matt Weinschenk: Yeah, I mean, that’s my take-away. I think things are going well. I think the Fed is handling this properly. We’ll see it make some moves, potentially in December, but probably spring, and in my opinion, we’ll see rates rise. But that’s a good sign, and everything seems to be going really well.