As if the first week of October wasn’t lousy enough, the second week of October proved to be even worse for TSP account balances.
The Dow Jones Industrial Average dropped more than 800 points (well over 3%) on Wednesday, followed by another drop of over 500 points on Thursday. Friday saw a partial recovery as the markets stabilized at the end of the week.
The S&P 500, which is tracked by the C Fund, has given up all its summer gains:
Since the beginning of October, the C Fund is down over 5.3%, the S Fund is down just over 8%, and the I Fund is down over 6.1%. For the bond funds, the F Fund is down 0.5%, and the G Fund is up a small fraction of a percent.
Higher Interest Rates
Most of the blame on this past week’s market drop was placed on rising 10-year Treasury yields and higher interest rates in general.
With the federal funds rate now at about 2%, the 10-year Treasury yield hit a high of almost 3.25% in the middle of this week. It cooled a bit to under 3.2% by Friday, which helped stocks rally to a partial recovery.
According to the Mortgage Banker’s Association, the average 30-year fixed mortgage in the United States hit 5% this week, which is the first time it hit that psychologically important number since 2011. Freddie Mac places the average slightly lower, at 4.9%, but still the highest since 2011.
President Trump expressed his dissatisfaction at rising rates by the Federal Reserve this week. “I think the Fed is making a mistake. They’re so tight. I think the Fed has gone crazy,” Trump said on Wednesday.
What the effective rate should be always has a degree of disagreement, partly because it’s so important. Previous Fed Chair Janet Yellen defended the current Federal Reserve policy this week, saying that it is “thoroughly sensible” and “not crazy”. Christine Lagarde, the head of the IMF, also said she would not associate the current Fed Chair Jerome Powell with craziness.
Popular CNBC financial media personality Jim Cramer, however, agreed with President Trump by expressing concern with the Fed under Jerome Powell, saying that he thinks the Fed is out of touch and that he misses Janet Yellen as the head of the Fed. “I want to Yellen-ize”, Cramer said on CNBC, referring to what he views as Yellen’s more cautious approach towards raising rates.
The Federal Reserve has kept interest rates at zero for an unprecedented amount of time during the long recovery from the 2008 financial crisis. But under both Powell and his predecessor Yellen, the Fed has been in the process of gradually raising rates over the past three years since late 2015:
Interest rates that are too low for too long run the risk of letting inflation get too high, causing asset price bubbles, dis-incentivizing saving due to low bank savings account rates, and enticing consumers and companies to over-leverage themselves with cheap debt. On the other hand, interest rates that go too high can derail economic growth by making it too hard to finance a house or expand a business.
The difficulty that the Federal Reserve faces is judging what inflation might be based on various rate levels and determining whether the economy is strong enough to absorb higher rates. Their dual goals are to maximize employment levels and keep inflation at around 2% per year.
Why Rising Interest Rates Matter
The market focuses so heavily on interest rates lately for countless reasons, but here are four key ones for TSP investors to know.
Headwinds: IMF Reduces Global Growth Forecasts
The International Monetary Fund updated their widely-watched global growth forecast this month, and slightly reduced their overall growth expectations.
The IMF cut its global growth target for both 2018 and 2019 from 3.9% to 3.7%, citing increased trade barriers between major economies and turmoil in certain emerging markets as the main concerns.
The expected 2018 GDP growth rates of both the United States and China were unchanged by the IMF, at 2.9% and 6.6% respectively. However, the IMF reduced their expected 2019 GDP growth rates for both countries, dropping the United States’ expected 2019 growth from 2.7% to 2.5% and China’s expected 2019 growth from 6.4% to 6.2%.
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