"I'm walking on sunshine...and don't it feel good?" — "Walking on Sunshine" as performed by Katrina and the Waves
Once again, bad economic news was cause for celebration on Wall Street.
Only 75,000 new jobs were created this past month. And the number of new jobs created in the last two months was recently revised downwards. With the economy slowing down slightly and the threat of tariffs weighing down growth, the Federal Reserve quickly announced that it is now open to lowering interest rates again. Markets loved this news.
Most sectors of the economy tend to benefit from lower short-term rates. Debtors with floating rate loans get a little reprieve as their monthly interest payments decline. Folks who bought a big house with an even bigger mortgage can refinance and reduce their monthly payments. Housing, construction and commercial real estate also benefit from lower rates both because of lower borrowing costs and because rental income streams are now more valuable. Big ticket items with relatively short payoff periods like cars, cranes and planes all become a little more affordable to finance.
In other words, if you hold all other factors equal, lowering interest rates helps the economy by spurring lending and growth activity.
So what’s the catch? That lower rates help spur growth is true, but only up to a point.
Investors should be concerned about why the Fed needs to be lowering borrowing costs with the unemployment rate close to all-time lows and massive deficits juicing the economy. It signals that even in an economic environment in which monetary and fiscal policy have both been largely accommodative for many years, we still feel the need to stimulate things a bit.
Historically, nominal GDP growth and interest rates are highly correlated. Simply stated, higher interest rates often accompany a strengthening economy. Today, the United States has the highest interest rates in the developed world and we also have the strongest economy.
Look around the world at the countries with the lowest interest rates and you’ll see anemic economies. Japan, France, Portugal and Italy have all had negative short-term interest rates for a long time, which should spur economic expansion if endlessly low rates really beget higher growth. And yet the economies of these countries are incredibly weak.
At the end of the day, raising and lowering rates is largely the only way the Federal Reserve can influence the economy. With growth slowing, they may need to cut rates, whether it’s good for the long term or not. But the real fear should be getting stuck in a looping cycle of low rates, low inflation and low growth. Let’s just hope the cure isn’t worse than the disease.
Margaret R. McDowell, ChFC®, AIF®, author of the syndicated economic column “Arbor Outlook,” is the founder of Arbor Wealth Management, LLC, (850.608.6121 – www.arborwealth.net), a fiduciary, “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.