Last month, when the Federal Reserve Board dropped their market making Fed Funds Rate by a whopping half point, everyone jumped for joy. It looked as if our potential economic nightmare was officially over.
Small business owners from coast to coast again looked at the projects they’d put on hold. With interest rates coming down, those deals might again become feasible.
Home buyers began doing walk-throughs again because interest rates on 30 year fixed loans went under 7%. But a lot of that came to an abrupt halt last Friday morning.
The weekly jobs report came out and surpassed all expectations. Most economists had expected the US to add 150K jobs.
But it came in at an additional 254K. All of a sudden 30 year mortgage rates are again over 7%.
In addition, given the unrest in the Middle East, the yield on 10 year Treasury Bonds is over 4%. This is another one of the benchmarks that banks use to set their financing rates.
With these developments, it’s obvious that we aren’t out of the woods quite yet.
Economists had been expecting the Federal Reserve to again drop the Fed Funds Rate by another 50 basis points at their next meeting. But many are now predicting that it will either be a quarter point drop, or nothing at all.
Given the fact that the Jobs Report came in so hot, many know that the Fed is going through a serious case of Buyer’s Remorse. They may have jumped the gun when it came to easing monetary policies.
The economy is still running hot given this jobs report. If inflation picks up again, they’ll be in serious trouble.
So they’ll either need to slow down their interest rate drops, or end them for a while. They’d need to do this until they’re sure that the economy has slowed sufficiently..
Let me leave you with this.
This may again put all of your projects back on hold. I’m asking you to be cautious. We don’t yet know where all of this is going to land.
There’s any number of possibilities.
Everything might actually be fine. The jobs report could be a blip that doesn’t mean anything. They could look at the rest of the numbers, see that everything’s okay, and continue their process of easing monetary policy.
They may have been a bit premature in dropping the rate. At that point they’d either drop it less or not all, allowing the economy to slow down over a longer period.
If they see inflation rearing its ugly head again, they might be forced to push the interest rates back up. But if they see the economy going into a recession, they’ll drop them like a rock.
Hence the uncertainty. We’re back in No Man’s Land; that uneasy and uncomfortable place where no one knows how to plan.
So be conservative in the management and protection of your businesses.
Now isn’t the time to become over-extended. You could end up the last guest at the party without a chair to sit on when the music stops.
Hoard your cash like a Viking King. Watch your hiring. Until we know where things are going, it’s not the time to be aggressive.
That time will certainly come, but it isn’t now.
We’re all going to get through this. Let’s get through it together.
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Sincerely yours,
Chris Amundson
President
Accounting Solutions Ltd.
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