Last week Trump announced Jerome Powell as his pick to lead the federal reserve bank replacing Janet Yellen. What does this mean for the trajectory of interest rates? How is Powell working with Shake Shack to keep rates low? Will there be any radical changes going forward? Where are interest rates heading? What should you do?
First, with the announcement last week that Jerome Powell was named fed chair, the markets breathed a little sigh of relief. “Jerome Powell is a smart choice for Fed chair,” said Richard Clarida, global strategic advisor at bond giant Pimco. “He is likely to provide monetary policy continuity by adopting Yellen’s framework of gradually normalizing rates and predictably reducing the Fed’s balance sheet. He is also likely to be more receptive to calls for adjusting financial regulation prudently, especially for smaller banks.” (source CNBC). Powell is definitely a moderate which is what the markets were hoping for.
Powell has also stated he will continue the slow and steady pace of tightening to try and “normalize” monetary policy. The fed is in uncharted territory and is basically flying blind as increased employment should also have led to increased wages. This is not happening which leads us to Shake Shack
How can employment increase yet wages barely budge?
Various minimum wage initiatives have gone into effect especially in high cost coastal areas. The objective was to increase the take home pay. Even with increased minimum wage laws, the actual wages are staying stagnant. How is this possible?
What does Shake Shack have to do with rates?
Shake Shack in their recent quarterly update said “All of the higher wage environments are getting somewhere between a 10 and 30 percent increase in starting hourly wage that will affect our company in next few years,”
“We need to answer how we take care of our team with that federally mandated wage,” said Chief Executive Officer Randy Garutti during a phone interview. “Our labor costs are skyrocketing.” (source: Bloomberg). Shake Shack like any business began taking steps to maximize their profit.
Shake Shack recently announced plans to use automated kiosks in lieu of employees to take orders at its new Astor Place location. This is not coincidental that this occurred as wages began increasing substantially. The goal is to reduce labor costs and at the same time increase throughput.
Shake Shack is keeping rates down
Recall that one of the largest drivers of inflation is wage growth. In a nutshell as wages increased, steps are being taken to mitigate the impact on the bottom line. Dominos and others have taken the same paths. I haven’t ordered a pizza by talking to someone in the last 5 years. I go online, put in what I want and the time I want the pizza with no human interaction. The changes at Shake Shack are just the beginning of structural changes to the economy that will keep inflation low and therefore rates down.
Where are rates heading?
In the short term, rates will likely increase moderately as the fed continues to pull back from the quantitative easing of the recession. This will be very slow as the economy is not showing signs of inflation. I see this happening over the next 12 to 24 months. Long term, without inflation, there is not a driver of a strong inflationary environment
What should you do?
If you are getting a mortgage, I wouldn’t worry about locking in more than 2-5 years. Long term rates are not going to increase substantially. Sometime over the next 2-5 years there will be a recession/ pull back in the economy that will allow you an opportunity to refinance at a lower rate.
Resources:
- https://www.bloomberg.com/news/articles/2017-10-09/shake-shack-claims-automation-won-t-hurt-its-famed-hospitality
- http://www.denverpost.com/2017/10/24/mortgage-bankers-association-rates-to-rise-through-2020/
- https://www.nytimes.com/2017/11/02/business/economy/jerome-powell-federal-reserve-trump.html
- https://www.cnbc.com/2017/11/02/trump-picks-jerome-powell-to-succeed-yellen-as-fed-chair.html
Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in the Colorado Real Estate Journal, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
Fairview is a hard money lender specializing in private money loans / non-bank real estate loans in Georgia, Colorado, Illinois, and Florida. They are recognized in the industry as the leader in hard money lending with no upfront fees or any other games. Learn more about Hard Money Lending through our free Hard Money Guide. To get started on a loan all they need is their simple one page application (no upfront fees or other games).