September 1, 2015

Improvements in Job Market May Prompt Interest Rate Hikes

The labor market in the US has shown some promise of strength over the past weeks.

With the job market and economy in the US showing signs of strength, an interest rate hike could be on the horizon.

Fed officials believe the US economy has overcome a 1Q slump, and is moderately improving despite the economic debacle overseas.

In particular, the US job market is currently strengthening, with solid gains in employment being seen over recent months. According to the US Labor Department, 215,000 jobs were created in July, with the unemployment rate remaining steady at a 7-year low of 5.3 percent. This strengthening in the job market raises expectations that the Federal Reserve will hike interest rates come September when policymakers meet.

Will the Recent Market Selloff Hinder a Rate Hike?

But with the recent stock market sell-off, many speculate that the low interest rate environment will drag on just a little longer as the Fed may be expected to delay its decision on whether or not to increase rates.

Last week, the Dow Jones industrials dipped near six-month lows, causing over 120 stocks of the S&P 500 to drop over 20 percent from their highs. This selloff continued throughout the week, ending off with the Dow experiencing a 7-day losing streak - its first in four years.

Officials have plenty of time to see how things pan out following this market selloff - after all, the Fed's policy making committee has two more meetings following its September meet-up, in October and December.

Despite disappointing 2Q earnings, investors are becoming increasingly anxious about the potential for higher interest rates. The recent job gains may be enough to convince the Fed of a labor market improvement, which officials require prior to a rate hike campaign being initiated.

While the stock market selloff has made it seem as though the odds of a September rate hike may be suppressed, new economic data has caused the Fed to reevaluate the situation.

The Bigger Picture: An Improved Economy

The unsettled financial markets over the past week don't match the stability of domestic economic growth over the last few years. It is this broader picture that the Fed is focused on. Even though we've seen a faster growth rate, officials seem to be convinced that the current health of the US economy is enough to warrant a rate hike sooner rather than later.

Banks are in a position to reevaluate their loan portfolios to maximize profit potential.

Even though it's possible that the Fed may choose to hold off on raising interest rates in the wake of the current market turmoil, such a delay would most likely be short-lived considering the fact that this volatility doesn't necessarily reflect a true economic collapse.

What Does This All Mean for Bankers and Their Loan Portfolios?

Regardless of whether or not interest rates remain low or will experience a rise in the coming quarter, banks remain in a position to reevaluate their loan portfolios.

As many banks have already proven in the recent past, a growth in loan portfolios can do wonders for widening profit margins. Wells Fargo, for instance, has seen profit increases with a boost in loan activity over recent months.

The San Francisco-based banking giant reported a net income of $5.7 billion in 2014, up from $5.6 billion, from the same time one year prior. Net interest income increased in 2014 to $11.2 billion, largely as a result of a spike in the bank's loans. Wells Fargo's total loans made in 4Q of 2014 jumped 4 percent from the same time the year before, with commercial loans growing at a pace of 10.3 percent and consumer loans increasing at 6 percent rate.

Market rates put banks in a position to decide which loan portfolios to buy and sell, and how much to hold in cash reserves. Banks can realistically earn higher profits if non-earning assets occupy a smaller proportion of loan portfolios, while higher-earning assets make up a larger percentage.

Determining this fine equilibrium can be a challenge, but with the right advisors in place who are highly versed in the realm of properly balancing loan portfolios for maximum profit, revenues can spike. There's clearly a lot of money that stands to be made from the growth of loan portfolios, and astute bankers and lenders are seizing these opportunities with the help of the right team backing them up.

This is precisely what Garnet Capital does. With years of specializing in the management of loan portfolio sales and acquisitions on behalf of banks and other credit grantors, we can help your financial institution realize widened profit margins through the growth of your loan portfolios.

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