If you read or hear the commentary coming from the Federal Reserve Board, it is not a matter of if a rate increase and tapering is coming. It is a matter of when they are coming. All bets are on an announcement coming at the next meeting and the tapering commencing in November. With regard to rate increases, the timeline has been moved up from 2023 to 2022 – which is not that far away.
But before everyone jumps on the bandwagon, we must go back to our most important tenant – you cannot predict the future. If the economy stalls and inflation wanes, we could see these dates extended. The jobs report of last week gave us an indication that the economy is still struggling to recover the jobs we lost. An increase of 194,000 jobs is consistent with an economy that continues to recover at a less than ideal pace, but the revision of the previous two months of reports upward by over 160,000 was good news. Likewise, the unemployment rate of 4.8% provided evidence that we are progressing as well. Overall, it was a mixed report, which is unsurprising.
There are two additional points regarding the concern that the Fed may raise interest rates more quickly than expected. First, the Fed is not likely to take the lead in raising rates. The markets will typically move before the Fed, as we have seen in the past few weeks in which long-term rates have risen because the Fed mentioned raising rates more quickly. Secondly, the Fed will be raising short-term rates. While short-term rates may rise in concert with long-term rates, they don’t always move at the same pace.