Interest Rates Up, Dollar Up, What Comes Next?

Money makes the world go around, but interest rates help determine where the money goes.

The past several days have seen ripple effects, well, ripple, as the economy absorbs the recent Fed rate hike, and interest rate watchers (who include, of course, people who own businesses or people who invest) take stock of where key lending rates may go. The overarching question is where rates will go this year and when.

Interest rate timing can have a bit of an impact on hiring, creating new jobs or hiking salaries to keep workers relatively satisfied in their current positions. The wild card for interest rates lies with the incoming Trump administration, where we’ll get the answers as to how much of the election campaign promises and rhetoric will become law.

The biggest pieces of the puzzle have to do with infrastructure spending and taxes, of course, alongside trade reform. The promises of sweeping reform and regulatory rollbacks imply that growth is meant to be unfettered in some respects, but interest rates, like stocks, tend to anticipate change before change becomes reality. Stocks are up, rates are up and that means the expectations are for growth.

What’s left for stimulation, beyond the stimulus, to bring that growth around? Worker productivity, for one thing. But that comes with technology and automation and takes a bit of time to play out. The stronger dollar puts a bit more growth on the table, with a ripple effect coming from international investors. Per the Fed, three rate hikes are in the offing, yet even after those are levied, interest rates are coming off a very low base, possibly not enough to stem the tide of construction activity that relies on borrowing to help fund projects. The Fed is waiting for more information before deciding what to do next, and so is everybody else.