- U.S. economic growth surged in Q2 2018, with GDP nearly doubling its Q1 reading and reaching its highest quarterly growth rate in almost four years, according to data released on Friday.1 Markets increasingly expect the Fed to raise rates four times this year. The market-implied probability of four or more rate hikes in 2018 is now at over 60%, up from approximately 15% in late May.2
- The chart highlights annual growth in average hourly earnings (wages), one factor that has helped drive monetary policy.3 While wages are up from the post-recession years, they have generally remained stagnant for the last two and a half years, which could potentially “cap” policymakers’ ability to raise rates over the long term.
- Further underscoring the challenges that income-seeking investors could face in the years ahead, John Williams, President of the Federal Reserve Bank of New York, argued in a May Economic Letter that we “all need to plan for lower interest rates than [we’ve] experienced in decades past.”4 Williams notes that demographics, productivity growth and the demand for safe assets all point to a sustained environment of low interest rates.4
- Given the recent economic spike, it’s important for investors to distinguish between the strong economic picture we see today and the drivers that underpin interest rate movements over the longer term. These factors continue to point to an environment in which interest rates remain low for the foreseeable future.
1 Bureau of Economic Analysis, https://bit.ly/1DqcVBJ.
2 The Daily Shot, July 25, 2018, based on data from Bloomberg.
3 Bloomberg, as of June 30, 2018.
4 Federal Reserve Bank of San Francisco, https://bit.ly/2mJRret.
The chart of the week and any accompanying data is for informational purposes only and shall not be considered an investment recommendation or promotion of FS Investments or any FS Investments fund. The chart of the week is subject to change at any time based on market or other conditions, and FS Investments and FS Investment Solutions, LLC disclaim any responsibility to update such market commentary. The chart of the week should not be relied on as investment advice, and because investment decisions for the FS Investments funds are based on numerous factors, may not be relied on as an indication of the investment intent of any FS Investments fund. None of FS Investments, its funds, FS Investment Solutions, LLC or their respective affiliates can be held responsible for any direct or incidental loss incurred as a result of any reliance on the chart of the week or other opinions expressed therein. Any discussion of past performance should not be used as an indicator of future results.