Not Enough Economic Mojo – Federal Reserve Will Likely Hold Off on Potential Interest Rate Hike This Week

By Scott Colbert, CFA Chief Economist, Director of Fixed Income - The Commerce Trust Company

September 19, 2016

The Federal Reserve (Fed) meets this week to discuss a plethora of economic issues, but when the shouting is over, raising interest rates another quarter point is not likely to happen just yet.

This decision is not rocket science. The potential negative effects of prematurely raising interest rates in a period while we are still deleveraging mountains of debt from the Great Recession likely still outweigh any harm lurking from future inflation and the fear that the reasonable job growth will compound into a rapidly overheating economy.

With no real danger of the economy imminently overheating, the Fed can afford to wait. If the U.S. economy manages to get out of its slow-growth rut, it can easily play catch-up with a series of interest hikes if needed.

There have been other historical times like these, both here in the United States after the Great Depression, and more recently, in Europe and Japan, where central banks have had to reverse any tightening measures after an initial preemptive rate hike. That would be operating procedure for a credit-driven expansion, but an anathema during recoveries with little or no credit growth.

So far, it appears the one interest rate hike of last December has been all this economy can handle. Some economists have said the first quarter-point interest rate hike in almost a decade last December actually carried the impact of a 2% jump relative to the rest of the world economies as they lower rates and use quantitative easing monetary policies. In other words, our one-and-done rate hike, which seems absurdly small, is actually much bigger when viewed in the context of what other countries are up to with their monetary policies.

When you add in the fact that September is the bumpiest market month of the year and the last rate hike caused worldwide market disruptions, support for a rate increase ought to be a tough sell. With surprisingly downbeat purchasing manager reports in August and U.S. retail sales falling more than expected amid weak purchases of automobiles and a range of other goods, the expectations of a Fed interest rate increase should logically be diminished even more.

However, don't count out a rate bump before the end of the year, even with the raucous national election approaching in November. The Fed has stated they will be “data-dependent” in rolling out a very gradual progression of interest rate hikes. We believe they should stick to their course. And hopefully the data will continue to improve and afford the Fed enough economic forward momentum to allow them to gradually take their foot off their monetary accommodation once again.

Takeways

  • No short-term interest rate bump by the Fed this month
  • U.S. economy is fundamentally sound, but stuck in a slow-growth mode.
  • Next Federal Open Market Committee meeting likely to see an interest rate hike is Dec. 13-14.
Disclosures
  • Past performance is no guarantee of future results, and the opinions and other information in the investment commentary are as of Sept. 19, 2016. This summary is intended to provide general information only and is reflective of the opinions of The Commerce Trust Company Investment Policy Committee.
  • This material is not a recommendation of any particular security, is not based on any particular financial situation or needs, and is not intended to replace the advice of a qualified attorney, tax advisor or investment professional. Diversification does not guarantee a profit or protect against all risk.
  • The information in this commentary should not be construed as an individualized recommendation of any kind. Strategies discussed here in a general manner may not be appropriate for everyone.
  • Commerce Trust does not provide tax advice or legal advice to customers. Consult a tax specialist regarding tax implications related to any product and specific financial situations.
  • Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. All expressions of opinion are subject to change without notice depending upon worldwide market, economic or political conditions.
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Considerations before Buying a Second Home | The Commerce Trust Company

Considerations Before Buying a Second Home

By Ryan Fleming Relationship Manager - The Commerce Trust Company

May 24, 2017

Background

It is estimated that between 6 and 10 percent of homes in the United States are second homes. If you are considering buying a second home, now could be a good time to take the leap with interest rates still near historic lows. Ryan Fleming, a Commerce Trust Private Banking Relationship Manager in Bloomington, Ill., discusses some common considerations for second-home buyers.

Q. Ryan, what are some of the pros and cons of a second home?

A second home purchase can fulfill a lifelong dream or become a nightmare. Many buyers can avoid the nightmare scenarios by making a balanced and informed decision.

The downside of buying a vacation home is that you will have two of everything – mortgages, property tax bills, water bills, fuel bills, etc. It also means additional responsibility for repairs and general upkeep.

At the same time, owning a second home can be very rewarding in tangible and intangible ways. It can be the source of relaxation, a place to get closer to your family or to engage in your passions or hobbies. It can also generate income if you choose to make it an investment property.

Q. What should a potential second-home buyer consider before making a purchase?

Think about your goals for the property. Do you want to buy a vacation home that will one day become the place you retire to, and perhaps even pass on to your children? A second home for vacations is very different from an investment property that you buy to generate income. That difference can affect your taxes and the insurance coverage you will need.

Many second-home buyers rent out the property part of the year to offset their expenses. There are different tax rules depending on how much you use the property for personal or rental use. There are many more considerations that are best explored with your accountant or financial advisor.

Q. Good tip. What else?

Take a look at the numbers. Consider whether you can afford to take on a second mortgage, plus insurance, maintenance, repairs, furnishings, and property-management fees, if you choose. Prices can vary greatly by region. Developing communities are less expensive than established vacation hot spots. An experienced real estate professional can help.

Q. What about getting a mortgage on a second home?

An experienced banker can be invaluable in helping to understand the costs of purchasing a second home and the loan options available to you. They can look at your current financial situation and the property you want to purchase, and advise you on what type of loan you may be eligible for. A banker can also help you get prequalified or preapproved for a loan before you start looking at properties, so you know what you can afford to buy.

Q. Any final thoughts?

Before searching for a second home, it is important to clearly define your goals for the home – whether it is a retirement destination, an investment property, or used for other purposes. Next, build your team of professionals, including a banker, tax advisor, and real estate agent who can help you navigate the process. Remember that purchasing a second home is a big decision that should be made carefully, and in the context of your total financial life. So be sure to include your financial advisor or planner.

Takeaways:

  • Think about your goals for the property. A second home for vacations is very different from an investment property that you buy to generate income.
  • Consider whether you can afford to take on a second mortgage, plus insurance, maintenance, repairs, furnishings, and property-management fees.
  • An experienced banker can be invaluable to understand the costs of purchasing a second home and the loan options available to you.

About the author - Ryan Fleming

Ryan Fleming

Ryan is a private banking relationship manager for The Commerce Trust Company. As a member of the private client team and an experienced, tenured private banker, he and his dedicated client support staff are responsible for ensuring each client's experience with Commerce Trust exceeds expectations. Ryan's specific responsibilities include management of our clients' day-to-day banking, cash management, and credit needs, while also helping them navigate the wide array of our financial services to find the solutions that best fit their needs. Prior to joining Commerce Trust in 2013, Ryan was a branch manager for Commerce Bank in Champaign. Ryan has a bachelor of science degree in agribusiness, farm, and financial management from the University of Illinois.

Disclosures
  • Past performance is no guarantee of future results, and the opinions and other information in the commentary are as of May 24, 2017. This summary is intended to provide general information only and is reflective of the opinions of The Commerce Trust Company.
  • This material is not a recommendation of any particular security, is not based on any particular financial situation or need, and is not intended to replace the advice of a qualified attorney, tax advisor or investment professional. Diversification does not guarantee a profit or protect against all risk.
  • Commerce does not provide tax advice or legal advice to customers. Consult a tax specialist regarding tax implications related to any product and specific financial situation.
  • Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
Connect with Commerce Trust
Contact us to learn more about how our approach might fit with your financial situation.
Learn more

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