Improving Confidence, Low Short-Term Interest Rates to Increase Borrowing in 2014
Tuesday, January 21st, 2014
It’s not time to break out the Dom Perignon yet, but this year’s economic forecast does give us some reason to celebrate.
After six years of rampant foreclosures, high unemployment and stagnant business investment, the American economy seems to have turned a corner. 2014 looks like it will be better than 2013, if only slightly.
The Federal Reserve cited recent improvements in the labor market and the economy when it decided to trim its $85 billion in monthly bond purchases by $10 billion at its December meeting. The purchases, a policy known as quantitative easing, are aimed at holding down short-term interest rates and spurring economic and job growth.
Since the Fed began purchasing Treasury bonds and mortgage-backed securities in September 2012, the unemployment rate has fallen from 8.1 percent to 7 percent, and the economy added an average of more than 200,000 jobs a month from August through November.
Fed Chairman Ben Bernanke said the Fed may continue “tapering” its purchases in increments of $10 billion and halting them altogether by the end of 2014 if the economy continues to grow. The Fed also agreed to keep short-term interest rates near zero until unemployment is well under 6.5 percent.
I expect the Fed’s decision to keep short-term interest rates relatively flat this year. But we will start to see a steepening of the yield curve with a slight increase in long-term interest rates. When talk of tapering first started in May, interest rates on 30-year fixed mortgages began rising from a historic low of 3.5 percent. 30-year rates are now hovering around 4.5 percent. These rates will likely rise higher in 2015 and 2016.
The historically low interest rates spurred sales of existing homes to an estimated 5.1 million for last year, according to the National Association of Realtors. That is up 10 percent from the previous year and the most since 2006. Economists forecast sales and prices will likely rise another 5 percent this year. Improving real estate values coupled with business investment both drive banking growth.
I believe business growth has been stifled lately by several uncertainties in the political and regulatory realm. But with mid-term elections coming up and the unknowns of the Affordable Care Act getting worked out I expect business owners to feel more confident later this year.
Stability encourages business owners to make longer term decisions. Many business owners have been putting off long-term investments such as capital expenditures but I expect that to change this year. This demand will lead to an increase in borrowing, but only slightly more than in 2013.
It won’t be the best we’ve ever had it, but I expect the 2014 economy to be the best we’ve experienced in the last six years and that should get us close to popping the cork on that bottle of Dom.
James A. LaHaise is President and Chief Executive Officer of The Coastal Bank.