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Interest Rates Jolt Higher with Economy

When 10-year treasury yields elevated above 3.25 percent early on Tuesday, they reached a 7-year high, returning to levels not seen since 2011. A controversial credit downgrade and global uncertainty would cause interest rates to tumble dramatically and remain relatively depressed until 2015, when the Federal Reserve raised interest rates from 0% to 0.25%.

With this in mind, it seems rather surprising to observe how quickly interest rates have risen since 2015 to their current levels. In the words of Lawler Jasper, the head of London Capital Group’s research unit,  “The US economy is on fire right now and the bond market has been underestimating just how hot the economy is.”

Arguably, there is certainly quantifiable ‘proof’ that the domestic economy is strengthening. However, it seems that the quarterly jobs report issued by the federal Bureau of Labor Statistics remains one of the most visible and quoted metrics defining the ‘health’ of the domestic economy. Now that unemployment levels in the US have reached historic lows, it may be time to reassess the power of this report and the true validity of the optimism it generates.

Although the number of individuals employed is certainly a credibly prognosticator of future economy activity (given the fact that money-in-pocket often becomes money spent), it is also important to remember that this specific data point is, in itself, a product of interpretation and filtering.

Take, for example, the fact that the so-called ‘establishment’ report – one of two surveys which are delivered to businesses and households, respectively – does not take into account the number of individuals involved in self-employment, one of the fastest growing sectors of the domestic (and global economy).

Jobs reports are also subject to two sets of revisions, one which takes place in the subsequent job report and then again within the next monthly report. Also, perhaps one of the most important factors to consider when evaluating jobs reports and unemployment levels is that these reports fail to include the number of individuals who – for whatever reason – have simply stopped looking for work. With these ideas in mind, it is relatively easy to understand why jobs reports occasionally present a slightly more optimistic outlook on the domestic economy than what may actually be present in reality.

With that in mind, an interesting dilemma is created. Interest rates are typically raised as part of the momentum created by a strengthening economy, and the strength of the economy is often justified in part by the number of individuals employed and / or seeking employment.

Given the fact that the Federal Reserve has hinted at a number of up and coming rate hikes for both the remainder of this year and throughout 2019, we are presented with an interesting question: assuming that jobs reports may vary widely in accuracy, with what frequency should we be raising interest rates knowing that workers – and the economy at large – may be expanding or contracting in ways that are not fully quantified.

Simply drawing a direct relationship between interest rates and jobs reports is over simplistic. However, given the profound implications of an interest rate hike, it is essential that investors find all information available regarding the myriad of factors influencing an interest rate hike in order to determine what, if any, actions they should take within their own financial strategy.