In our previous article [http://byteclay.com/article/the-fed-finally-does-it] we offered a number of graphs and charts that immeasurably helped us more clearly grasp the magnitude of the December 16th decision by the U.S. Federal Reserve to raise the “Federal Funds Rate” for the first time in almost 10 years. Although the Fed only raised the rate by 25 basis points (0.25%), it was still “historical” in the sense that it marked the beginning of a “Liftoff” from an extended period of rates that have been lower than ever before.
However, none of us actually deals with the “Fed Funds Rate” directly. The rate that most directly impacts us is the “Benchmark” rate in the United States – the U.S. Treasury 10-Year Note. Movement up or down in that rate has a much more direct impact upon the rates that we see when we borrow to buy a home, purchase an automobile, use our credit card, take out a student loan, etc. Obviously, it also has an impact upon the rate we receive on our savings and C.D. accounts.
So let’s supplement our look at the Fed Funds Rate by looking at historical data related to the U.S. Treasury 10-Year Note. Reviewing these graphs and charts will help us gain an additional perspective regarding how unusual (actually, it is unprecedented) this period of low interest rates has been. See the “Slide Show” for views of this data.
During the past few years we have heard and read about our “record low rates”, but it is very easy to lose perspective on just how low they have been compared to the period since World War II! The “highlights” above provide us with a look at the “High” point of rates on the 10-year Treasury Note during each period shown… including for each year since 2006 (just before the “Financial Crisis”).
It is a bit hard to believe that our rates during the past 9 years have stood at half the 1990 rate… between one-quarter and one-third the rate from 1981… and even (on average) less than half the rate from 2000!
These ultra low rates have been the direct result of the Federal Reserve’s “Zero-Interest Rate Policy” (or “ZIRP”) [a policy initiated in December 2008 by (then) Fed Chair, Benjamin Bernanke]. This ZIRP policy has brought considerable hardship to “Savers” in the United States – especially Senior Citizens on fixed income budgets (who were counting heavily prior to their retirement on interest and dividend income).
It is ironic (and fascinating) to note that on the day the Fed raised rates (December 16th) the benchmark U.S. Treasury Ten Year Security yielded 2.30%. Less than two months later, that yield had fallen all the way down to the “historically low” level of 1.63%. What this teaches is that the Federal Reserve is always at the mercy of “the Market”… the collective perception of investors (big and small) with regard to the direction interest rates actually move (and by how much). Quite frankly, many market experts think that the Fed was out of touch with economic reality in December and raised rates for the wrong reason. Those observers suggest that it is doubtful that the Fed will make another move anytime soon to raise rates a second time [in fact, some think they won’t move again until 2017].
That being said, the simple truth is that no one can confidently predict where rates will move in the months ahead. It is clear that the U.S. economy is still struggling with only modest incremental improvements in positive economic data, and the Fed has promised it will become more “accommodative” on monetary policy whenever the need arises. Therefore, it is reasonable to suggest that rates may go higher in a few months, or (alternatively) that rates may not go any higher for many months to come. The health of the economy will dictate what the Fed chooses to do.