“Through the coldest winter in almost fourteen years …
I couldn’t believe … you kept a smile.” — from “Mandolin Wind” as performed by Rod Stewart
There’s an extra spring in the step of Walmart employees this week as the company recently announced across the board minimum wage increases. Because one percent (1.4 million laborers) of the American workforce are employed there, and since wage growth is a primary driver of inflation, some economists actually expressed hope that Walmart’s new policy could trigger a bit of much needed domestic inflation.
In our view, however, inflation and interest rates are likely to remain low for a while. The year 2008 was the culmination of a long term debt peak. The U.S. is attempting to pay off massive public debt, and private deleveraging also continues. For debt reduction to occur, interest rates must remain below GDP growth. And since economic growth will likely remain moderate in the near future, higher interest rates or mounting inflation don’t seem to be in the offing.
Quantitative Easing did not cause runaway inflation or erode the greenback, as many feared. Inflation reacts to actual spending, not how much money is floated. Uncle Sam could print a trillion dollar bills, but if that money is immediately stuffed under a mattress it won’t move the inflation needle. Inflation has remained extremely tame for a number of reasons. Companies are hoarding cash. Continued globalization means Americans are competing for employment with workers around the world and have had to accept lower or stagnating wages. And of course the price of oil has roughly halved since last June’s peak, counteracting price increases in other sectors like health care and adding to deflationary pressures.
So there is currently a huge microscope on the policies of the Federal Reserve and their decision on whether to keep interest rates low or raise them in 2015. The Federal Reserve would like to raise rates in the near future to signal that the economy is normalizing, but that goal is made less attainable when accompanied by falling prices. So unless we experience a large jump in inflation or domestic growth, odds are that the Federal Reserve will continue its trend of low interest rates. We might see a very small increase, but larger jumps anytime soon don’t seem to be in the forecast. Simply put, if growth is limited, interest rates will probably be as well.
Europe and Japan are battling deflation, so our monetary officials are encouraging spending and investment and are watchful of the threat of importing deflation from abroad. With CD’s returning such a pittance, many Americans have invested in the markets. Savers and investors waiting for the Federal Reserve to push up interest rates to earn better CD yields may be waiting a while.
Margaret R. McDowell, ChFC, AIF, a syndicated economic columnist, is the founder of Arbor Wealth Management, LLC, (850-608-6121 — www.arborwealth.net), a “fee-only” registered investment advisory firm located near Sandestin. This column should not be considered personalized investment advice and provides no assurance that any specific strategy or investment will be suitable or profitable for an investor.