Chief Lending Officer
HOW WILL INTEREST RATES FACTOR INTO OUR ELECTION-YEAR FUTURE?
Every major election year brings to the forefront excited discussion on important civic, social, and financial topics. Monetarily, we all expect—with increased attentiveness—more short term interest rate adjustments to greet our doorstep in 2020; some before and some after voting results get tallied. Let’s take a look together at factors that may instigate rate change this year.
State of the World
The state of the world’s health this year, more than any other we have experienced in this new century, is impacting everyone. The Chinese pandemic has not only touched international markets, but also now guides (for example) protocol down to the protection of personnel and members in our credit union partner organizations, and how each interacts with the public. And of course, taking care of one another is always good policy.
Before the Coronavirus, I would have predicted that our President would push for lowering short-term rates. This type of adjustment typically boosts the economy during an election year. And while historically low interest rates have already brought record-high U.S. employment rates and supported stable property values and active debt markets, a normal election year strategy would be to fuel the economy to the extent possible. At a local level, many of our communities have benefited from low borrowing rates as companies felt secure enough to invest in growth, add employees and expand use of premises.
Now, lower rates are sure thing and new economic headwinds have emerged. Since the COVID-19 outbreak, the Federal Reserve has lowered rates 0.50% and the President is pushing for further reduction to fuel the economy, ostensibly due to adverse economic effects on markets from the Coronavirus. Travel and imports are down, labor and goods supply has decreased; while, medical materials and properties are up. Overall market and business sentiment has turned cautious and benchmark U.S. Treasury rates have fallen dramatically. In commercial real estate borrowing markets, interest rates for quality loans have dipped below 3.00% in many cases, and several banks and other institutions are offering borrowing rates well below 4.00%.
How It Hits Home
This past week, public health professionals have indicated that the peak of the virus’ impact can be expected in the next 4-6 weeks. During this time, they anticipate the number of cases to escalate dramatically. Then, we’ll see how it hits us as a business community. As expected, all the major news media continue to inform us, the public, on the CDC’s and WHO’s prognosis, as well as on practices for safe hygiene. Each new revelation or statistic plays as a variable in the commerce of our daily lives.
What can you expect at the office? We may very likely see one more downward adjustment to short term rates before the end of the year. However, we don’t see much more room to reduce short or long-term rates further. We’re near to reaching that lower limit, for businesses to continue doing good business.
So, what other tools does our government have to support continued economic growth? Regarding other economic stimulus options, starting quantitative easing is generally too slow to help the economy effectively in 2020 and further tax cuts seem unlikely. As a result, limited other stimulus including spending packages to combat COVID-19 is being worked on, but few other solutions appear to be on the horizon.
Of course, you’ve anticipated economic slowing for a few years now. The virus, and more recently the Russia-Saudi oil feud, currently give us a justification for equity and capital markets to decline and business investment to slow. If not more clearly, we do see the cause and effect more acutely. It also explains some of the other fiscal changes we already see and will continue to see. Obviously, we have a recession trigger event here. One we’ve identified and foreseen. And, one that requires credit union organizations to be more judicious.
The Difference A Day—Or, A Candidate—Makes
Post-election, if Donald Trump wins, interest rates will probably increase 0.50% to 1.00%. Regardless of one’s personal beliefs, the incumbent is seen as a business-friendly President. Also, conservative Wall Street likes stability. At the other extreme of the aisle, if Bernie Sanders wins, 2021 interest rates would likely stay lower. People, including market decision makers, perceive him as an anti-business President. Riding the middle-of-the-line, with Joe Biden as President, expect policies somewhat more similar to a moderated version of President Trump’s, yet, not as aggressively progressive as Sanders’. (Other candidates, whatever their likelihood of party representation, fall within the Trump-Sanders spectrum.)
Summing It Up:
These current events place as the top two influencers on interest rates in the upcoming few months, gearing toward the next year’s economic and market outlook; but to what degree? Will capital markets be as bad as they seem today, and are we headed for a recession? What will happen to commercial real estate? Let me make some predictions in financing for this election year, and beyond:
- On one hand, because the flu season typically lasts 90 days, the Corona Virus’ impact should be significantly diminished by 2021.
- We think the Russia-Saudi oil fight will subside in 2020.
- On the other hand, if the virus turns out to be a recession trigger, indeed, that causes ongoing negative sentiment in business and investment, then we can expect banks, life companies, CMBS and credit unions to aggressively reduce exposure to CRE lending.
- Fewer more cautious lenders in the market would eventually drive borrowing rates higher, but for the current time we are in an historically competitive rate environment. If the economy returns to today’s recent up trend, then we can only wait (historically) for another economic shock or inflation to cause a needed rate adjustment.
The end of the story, as is always the case, is to keep your finger on the pulse of news and public policy. Adversity and decline always open up other—often unseen—opportunity. While ready availability opens up new ability. Whether interest rates rise or fall, our CUSO friends must weigh the risk of loan projects with diligence. During those decisions, we will always first lend you an ear. And I can do that personally over lunch or a cup of coffee.
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