Garnet Capital Advisors Blog

September 17, 2015

Current and Future Interest Rate Environment: Decreased Need to Raise Rates

Interest rates continue to stay low, especially with economic turmoil plaguing global economies.

The Federal Reserve has essentially been keeping interest rates at dramatic lows since December 2008, but the question remains: how long will this carry on for? And are we as anxious for a rate hike as we once were?

For months, economists have been anticipating a hike in interest rates. But the recent market sell-off following China's "Black Monday" have put a halt on any chances of an imminent rise in rates.

China has been experiencing an economic slowdown, in addition to less-than-par export levels. That, coupled with the devaluation of the yuan, has brought China to an inevitable crash.

Considering how strong China's trade ties are with various nations across the globe - including the US - its economic slowdown has put a lid on international growth. As a result, the crash in China had an obvious impact on stock markets in the US and other emerging markets.

And while we all know that the current interest rate is extremely low, it remains to be seen how much longer this environment will last. The Fed has been expected to hike rates this month, but with the latest debacle overseas, economists remain pessimistic about the prospects of an increase.

The Federal Reserve may be delaying its decision regarding an impending rate hike, given the current circumstances. In fact, economists warn the Feds that an increase in interest rates in the coming days would only inflict turmoil among investors and lenders.

With the increasing volatility in markets across the globe, the US economy must be strong enough to weather its own growth and hedge against any unwelcome surprises that might pop up.

Lull in Inflation in the US

US inflation is currently very low, largely as a result of the decline in prices of oil and raw materials. In fact, according to an analysis published by the San Francisco Federal Reserve Bank, US inflation in the first half of 2015 was probably much lower than what was initially reported.

So what exactly is behind the plunge in oil prices?

Brent crude has been trading around the $48 a barrel mark, and it's not expected to reach its norm over the past decade of $90 or $100 a barrel for years. US domestic oil production has almost doubled over the last few years, forcing oil imports. Algerian, Saudi, and Nigerian oil that was previously sold in the US is now competing for Asian markets, prompting oil producers to lower prices.

The lower cost of oil pushes gasoline prices down for consumers, and inevitably filters throughout the economy, thereby putting a lid on broader inflation.

With a continued letup in oil prices, inflation will be further dampened. This, coupled with a strong dollar, is placing continued downward pressure on inflation.

With a continued low inflation comes a more cautious monetary policy position of the Federal Reserve, which has tied the condition of inflation to its decision of when to increase interest rates.

The housing market has remained stable through the second quarter 2015.

But this scenario is said to be only temporary, according to Federal Reserve Vice Chairman Stanley Fischer.

Since these factors will eventually stabilize, so in turn will inflation.

Stabilizing Housing Market Over the Summer

According to the S&P/Case-Shiller Home Price Index, US home price growth remained relatively flat in June, further pointing to a steady housing market following years of volatility. But economists warn that the report doesn't take into account whether or not there will be any effect from the latest market news.

Outside of the hottest markets in the country, economists say there is evidence to show that the housing market is entering a cooling-off period. So far this year, home price gains have stayed flat at a little over 4 percent across the country - two to three times the rate of inflation.

The home price gains have been consistent as inflation remains steady, unemployment rates decrease, and the Fed policy remains unchanged.

Volatility in the stock market and a sizable rise in interest rates could derail housing. If the Fed quickly follows its initial move with another rate increase or two, the housing market and home prices could suffer.

Having said all that, the Fed has reason not to rush into a hike in interest rates. While US banks and creditors look forward to higher interest rates, that scenario will most likely not come to fruition any time soon.

Banks and the Loan Market

So what are banks and lenders to do in the meantime to protect their revenues and reduce costs during this extended season of low interest rates in the loan market?

At the end of the day, banks need to seriously consider re-evaluating their loan portfolios, and grow them altogether.

Plenty of banks across the country have proven that growing loan portfolios not only provides a hedge against a prolonged low interest environment, but also plays a key role in the growth of revenue. Balancing loan portfolios through the sales and acquisitions of loans allows banks and lenders to ensure that a bigger chunk of their portfolios lies in higher-earning assets.

Financial institutions are in a better position to grow their loan portfolios through the advice of those who are well versed in the realm of the loan sale and valuation processes. With extensive transaction expertise across commercial loans, consumer loans, residential loans and charge-offs, Garnet Capital can help ensure continued growth in revenues and earnings, despite our slowed economy and hesitation among the Fed to boost interest rates.

We encourage you to browse our white papers to find out more about our expertise and our far-reaching knowledge and experience in loan sales and acquisitions.