Finance The “outlook” for interest rates If you’re looking for an opinion regarding where interest rates are headed, you’ll have no problem finding analysts, economists, pundits, financial journalists and others who are more than willing to share their reasons why rates will do this or that in the coming months. While such arguments can be very persuasive, the fact remains that nobody can be 100% sure what the Fed (or other central banks) will do. Even professional economists find the direction of interest rates difficult to predict, while predicting the implications of a rate move is even more difficult. Keep that in mind whenever you read any “outlook” for rates (including this one!). That aside, we can make some general statements about what rates will probablydo. Right now, most analysts and market-watchers expect U.S. rates to rise over the next several years as the U.S. economy strengthens and the Federal Reserve gradually weans the population off of easy credit. Indeed, many economists believe that such a move is overdue – low interest rates encourage over-borrowing and a lax attitude to saving. You can see the implications of such behaviour in the financial crisis of 2007-2008. Something else to keep in mind is that President Trump’s stated policy goals – specifically, his plan to engage in a massive nation-wide infrastructure rebuild – may well cause the prices of goods and services related to that infrastructure (everything from the price of steel or gasoline or concrete or construction labour) to rise. This, in turn, may force the Fed to raise rates faster than it otherwise would. Will Trump actually go ahead with these plans, or is it just talk? Will such plans pass through Congress, or will they get caught up in some larger political battle? Your guess is as good as ours. But it’s certainly something to think about. Here in Canada, the economy has up until now been considerably weaker than in the U.S., due in no small part to low oil prices. But that may be changing; economic growth has surprised to the upside over the past several quarters, which means that it’s no longer likely the Bank of Canada will cut interest rates in the months to come. Recently, Bank of Canada governor Stephen Poloz stated his view that the Canadian economy is likely to return to “full capacity” sooner than expected. All of whichmakes it a lot easier to start talking about a rate hike in the months to come. Of course, a lot can change in a fewmonths. So we’ll have to wait and see if these conditions are enough to shift the Bank of Canada into “raising” mode. However, from where we are now, we can be reasonably sure that the era of rock-bottom rates is coming to an end here in Canada, just as it has in the U.S. Eventually, Canadian rates will rise, just as they’ve done south of the border. So, what (if anything) do rising rates mean for your finances? Let’s answer that question in two ways: (a) how to protect yourself from rising rates, and (b) how to profit from rising rates. CSANews | SPRING 2017 | 29
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