Opening Statement from the April 2017 Intelligent Investor
Originally published on April 7, 2017 (pre-market release)
Update on Interest Rates
Consistent with our forecast, on Wednesday, March 15 the Federal Reserve raised interest rates by 25 basis points, as we had previously forecast. This marks only the third interest rate hike by the Federal Reserve in nearly a decade.
Over the past several years we have been providing a multiyear interest rate forecast in order to aid investors with asset allocation and risk management duties. Throughout this period we continued to forecast persistently low interest rates in spite of more hawkish forecasts made by academic and Wall Street economists as well as Federal Reserve officials.
These forecasts were based on our assessment of the lingering deflationary pressure felt by much of the globe. Aside from the expected deflationary shock in the aftermath of the financial crisis, in late 2010 we first warned of a sizable and persistent deflationary force that would engulf Europe and spread to other parts of the globe. A couple of years later after noting the impact of the Fed’s quantitative easing program, we concluded that short-term interest rates in the U.S. were unlikely to exceed 3.00% by 2020. We reiterated this forecast through July 2016.
“We have previously stated that we believe short-term interest rates are not likely to exceed 3.0% prior to 2020. In fact, given current macroeconomic conditions, we would not be surprised if rates were not to exceed 2.0% prior to 2020.” – June 2015 Dividend Gems
Specific forecasts aside, we emphasized that short-term interest rates were likely to remain significantly lower for a longer time period than most economists and investors envisioned.
“As we have previous stated in the Intelligent Investor and Market Forecaster, based on the current macroeconomic landscape, we believe short-term interest rates in the US are likely to remain under 3% through 2020 and may not even reach 2.5%...The main point is that rates are almost certain to remain low from a historical perspective for longer periods than most economists and analysts estimate. In fact, vice chair of the Fed, Stanley Fischer recently stated that he believed rates would be raised somewhere around four times in 2016. In our opinion, based on what we see in the global economy today, if rates were raised in the US four times, each by at least 25bp in 2016, it could be instrumental in causing a recession.” – January 2016 Dividend Gems
We also stressed the need for investors to focus more on the pace of rate hikes rather than the exact timing of each hike.
“Finally, it is important to remember the need to focus more on the pace of expected rate hikes over the next several years rather than focusing on which month a particular rate hike might occur. Regarding this former, much more relevant consideration, we reiterate our stance that rates are likely to remain low for many years and are not likely to reach 3.00% by 2020.” – May 2016 Dividend Gems
In August 2016 we
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