The economy has been growing at a rampant pace, evidenced by a spate of positive second quarter earnings that has been accompanied by rising interest rates. While the bond markets are eyeing yield curves for an inversion, a possible sign that a recession could be on the horizon, others view the market’s continued upswing in conjunction with higher rates as a healthy sign.
“I think it’s a sign of a healthy market,” said Gordon Charlop, managing director and partner of Rosenblatt Securities. “If you look at the way this whole bull run has been triggered by low interest rates, maybe these prices are somewhat elevated so to see that the market is staying where it’s staying and the rates are going up is an encouraging sign.”
Just last week, the Federal Reserve upgraded their view of the economy to “strong,” thereby leaving the door open for more rate hikes to come through the rest of 2018. The Fed also stated that the labor market has “continued to strengthen,” which was evidenced by the latest economic data revealing that private payrolls increased in July by 219,000 versus an expected 185,000, according to data provided by ADP and Moody’s Analytics. In addition, the unemployment rate is at a generational low of 4%.
Related: Why the Economy Doesn’t Benefit from Falling Mortgage Rates
Compounding the stronger economic view was the Commerce Department reporting that GDP grew at a 4.1 percent rate in the second quarter, which represents its fastest in nearly four years. In June, the Fed estimated that GDP would rise 2.8 percent for the full year until it was changed to 2.4 percent for 2019 and 2% in 2020 before settling into a long-term pattern of 1.8%.
Meanwhile, the S&P 500 is trading near an all-time high, shrugging off any effects of ongoing trade wars between the United States and China. Also, the U.S. dollar is strengthening via a 3.6% year-to-date increase in the U.S. Dollar Index.
“I think by and large the fact that the interest rates are going up a little bit and the currency is fluctuating, it’s still not going to be enough to derail what we’re seeing right here,” said Charlop.
All of the aforementioned data almost provides a clear, unobstructed path to raising interest rates in September. Looking at the federal funds rate chart for the last five years, the short-term rate adjustments have presented a steep incline with possibly more to come.
The path to higher interest rates won’t come without U.S. President Donald Trump voicing his disdain for elevated rates. Earlier this year, President Trump expressed his disdain for rising rates, telling CNBC in an interview that he was “not happy about it.”
“I’m not thrilled,” said Trump. “Because we go up and every time you go up they want to raise rates again. I don’t really — I am not happy about it. But at the same time I’m letting them do what they feel is best.”
“But I don’t like all of this work that goes into doing what we’re doing.”
For more fixed-income trends, visit the Fixed Income Channel.