Are Interest Rates Going Higher Sooner Than Expected?
After closely watching geopolitical events play out, the focus of many investors has shifted to the Fed and interest rates. Between the most recent Fed Meeting notes being released and the conference in Jackson Hole, there’s been ample opportunity for Fed watchers to (attempt to) glean information about the future of interest rates.
However, Yellen’s sticking to her standard response for the most part – that is, it will happen when it needs to happen.
Of course, the Fed Chair gave a bit more color on the situation. But, you basically get the gist of it. Generally speaking, the economy has gotten better but it still has a ways to go.
The Great Financial Crisis and the ensuing recession caused a severe amount of damage to the job market. And, it’s taking a very long time to repair. Jobs are definitely coming back, but there are still many people who are unemployed or under-employed.
What’s more, wage growth has essentially been non-existent. People may be getting hired more frequently, but their pay hasn’t caught up with the times.
Certainly, the Fed is going to be keeping a very close watch on wages, wage growth, and consumer spending moving forward. In other words, it’s not inflation we should be focused on, but how much Americans are getting paid (and then spending).
Let me try to summarize the situation…
Despite the recent surge in hiring, there’s plenty of slack in the labor market, according to the Fed. As it stands now, rates aren’t going higher until mid-2015, most likely. However, if wage growth accelerates more rapidly than expected, the Fed could bump rates sooner than expected.
Overall, I wouldn’t worry too much about an unexpected rate rise anytime soon. Still, it makes sense to pay close attention to the economic data.
From an options trading perspective, there are several ways to play interest rates. There are direct methods such as options on Fed Fund futures or other interest rate futures. In addition, there are options on Treasury ETFs at all points of the yield curve.
However, ultimately the easiest way to play rates is to use equity indices like the S&P 500. Stocks are closely tied to rates at this point in time, so why not keep things simple?
That being said, the hard part is trying to predict when rates will go up.
Yours in Profit,
Gordon Lewis
Category: Options Trading
