George Hosfield, CFA, discusses Ferguson Wellman's quarterly strategy titled, "Inflation's Flame Flickers," which addresses the narrow market leadership, the impact of higher interest rates on inflation and how assets are priced at this stage of the economic cycle.
George Hosfield, CFA, discusses the firm's quarterly strategy titled "Stalemate," which highlights the Fed's ongoing battle to tame inflation along with our views on the health of the banking industry and capital market expectations for the balance of the year.
Director and Chief Investment Officer George Hosfield, CFA, discusses the Fed raising interest rates, peaking inflation and our view on equities and volatility across all asset classes in our Investment Strategy titled, “Balancing Act.”
For the week, the equity markets were down more than 1 percent as investors followed political events in Washington D.C. While the markets have been mostly focused on the global surge in earnings growth this year, political drama took center stage this week as there are concerns that the current administration will be unable to successfully enact tax reform and deregulation.
With U.S. large cap stocks down over 10 percent, it hasn’t been a happy new year for investors. The Fed tried to alleviate fears this week on Capitol Hill by stating that they realize the current volatility may lead to slower economic growth and thus there will be no March rate hike. While the talking heads weren’t impressed with the statement, we believe that it was a positive and highlighted the fact
Oregon Bankers, Businesses Await Fallout from the Fed Rate Hike
by Andy Giegerich
Portland banking leaders have steadfastly agreed that the prospect of a higher federal funds rate, the figure set by the Federal Reserve by which other interest rates are set, won't affect commercial lending.
After the Fed pulled the trigger on a hike, it's now time to find out whether that'll remain true.
Linda Williams noted even with the hike, interest rates "are still low and attractive from a borrowing perspective.”
The Federal Reserve on Wednesday said it would raise the figure, and by extension short-term interest rates, by 0.25 percentage points. The rate will now range between 0.25 percent and 0.50 percent.
The Federal Reserve announced the decision Wednesday morning. The body had been expected to boost the rate in October.
"Household spending and business fixed investment have been increasing at solid rates in recent months, and the housing sector has improved further; however, net exports have been soft," Fed officials said in a statement announcing the hike.
"A range of recent labor market indicators, including ongoing job gains and declining unemployment, shows further improvement and confirms that underutilization of labor resources has diminished appreciably since early this year. Inflation has continued to run below the Committee's 2 percent longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation remain low; some survey-based measures of longer-term inflation expectations have edged down."
The Federal Reserve hadn’t raised the benchmark interest rate for seven years, holding it near zero since 2008. Today's decision earned unanimous approval from the Fed, including an endorsement from Chair Janet Yellen.
Locally, at least one financial services firm reacted with a shrug.
"This was certainly the most talked about and anticipated Fed rate hike in history," wrote Ferguson Wellman Capital Management advisers. "As such, anticipated events become nonevents to the markets."
Specifically, the bond market was a bit lower while stocks were up 1.5 percent.
"The economy is robust enough that the Federal Reserve wants to 'tap the brakes' to keep the economy from overheating," the advisers wrote. "Ultimately, this rate hike should be interpreted as good news for the markets and economy."
We asked a few local bankers about the rate increase possibility in September.
“The anticipated interest rate increase hasn’t had an immediate effect on the Oregon middle market," said Ralph Hamm, Wells Fargo's commercial banking manager for Oregon.
"The common sentiment is that an increase is long overdue. A small interest rate uptick would send a positive message that our economy is improving, which is also supported by local signs of growth.”
Linda Williams, president of Washington Trust Bank's Oregon region, agreed.
"Commercial loan demand remains solid and financial institutions are actively competing for business," she said. "Any impact from interest rate increases will probably not occur until several interest rate increases have occurred. By historical standards, interest rates are still low and attractive from a borrowing perspective.”
However, Rick Roby, president and CEO of Premier Community Bank, fears that the boost could "raise the cost for businesses and could possibly cause a contraction of borrowing which over time will slow the economy. This type of environment creates more intense competition for acceptable credits."
Late last month, Dave Lofland, KeyBank's market president for Oregon and Southwest Washington, accurately predicted that the Fed wouldn't make any sharp hikes.
"For that reason, we don’t think any rate hike will be a serious impediment for the ability to borrow," he said.
"For many companies, their challenge isn’t the interest rate but what to do with their cash. The industrial side of the economy continues to struggle. It’s not pointing necessarily to a recession, but it’s made businesses more cautious. Many businesses have just struggled to deploy cash so they’re sitting with cash on the sidelines or capacity on their loans without industrial projects to go after."
by Ralph Cole, CFA
Executive Vice President of Research
Stuck With You
We all know too much of a good thing is no longer a good thing: that has been the case with interest rates in recent years. Coming out of the financial crisis, banks needed lower interest rates so they could repair their battered balance sheets. Short-term rates came down even faster than long-term rates and allowed banks to pay virtually nothing on deposits and make loans at a substantial profit. As long-term rates have come down, banks have had to lower what they charge for loans, thus reducing their profit margins (otherwise known as net interest margins). For the last couple of years, banks have been hoping for higher rates. Thus far this quarter they have received their wish and we can see that regional bank stock prices have responded well.
Source: FactSet
The correlation between U.S. 10-year Treasury yields and the regional bank index has been remarkable. The theory is that as long-term rates rise banks will be able to charge more for the loans than they make. They will also get higher returns on bond investments that they offer. These improved profit margins will help bank earnings. Much like the relationship between oil and gasoline prices at the pump, banks will be slow to raise interest on deposits and much quicker to increase what they charge on loans. We expect rates to continue to move higher throughout the rest of the year.
Every Little Thing Is Going to be Alright
In a year when the Fed is expected to raise interest rates every piece of economic data is parsed and picked apart. This week it was retail sales and consumer comfort. Retail sales were strong, whereas consumer comfort came in weaker than expected … So let’s just step back for a moment.
Employment gains have resumed their 200,000+ trajectory from 2014. Wage growth is finally starting to flow through the economy. Consumers and corporations continue to benefit from generationally low interest rates. We believe the consumer and the economy are on solid footing and that bodes well for whenever the Fed starts raising rates - be it June, September or December. We caution all not to worry too much about the daily economic numbers or the daily movements in the stock market.
Takeaways for the week:
