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Rate Hikes on the Horizon—but When?

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RANDY FREDERICK: Fed Chair Janet Yellen’s speech last Friday at the Jackson Hole Central Bankers Conference caused some wild swings in the equity, bond and currency markets. Kathy Jones, Schwab’s chief fixed income strategist, joins me for the August 29 Schwab Market Snapshot to help us decipher the Fed’s intentions and to give us her take on interest rates. Welcome back, Kathy.

KATHY JONES: Thanks for having me, Randy.

RANDY: So, Kathy, during Janet Yellen’s speech last Friday, initially it sounded like she was trying to make the case for raising interest rates sooner rather than later. But then the more she spoke, the more confusing the messages got. So from your perspective, what exactly was Janet Yellen trying to convey? And was it just more of the mixed signals that we’ve been hearing for the last several months?

KATHY: Well, initially, it seemed as if she was pretty much on point with saying what she has over the past, and that is that we should expect an interest rate hike sometime later this year. She used a phrase, however, “the case for an increase in the Fed Funds Rate has strengthened in recent months.”

And that got people shaken up because it seemed to signal maybe an earlier rate hike than they’ve been discounting. But then she followed it up with the usual caveats about the Fed watching the data and there was no specific timing offered. So, initially, the bond market sold off and then it rebounded again.

RANDY: And as if deciphering Janet Yellen’s comments weren’t difficult enough, then we also heard from Vice Chair Stanley Fischer. And of course he sounded a lot more hawkish than Janet Yellen. From your take, was Fischer trying to deliver the same message or something else?

KATHY: Well, his comments came right after Yellen’s speech, and what he said was that—that Yellen’s comments were consistent with two rate hikes this year, which was a surprise because that’s not the way most of us had interpreted it. I think the only consistent message coming from the Fed right now is that they’re poised to raise interest rates. Whether it’s one or two this year still remains to be seen, but they do seem to be on track to raise interest rates before the year is out.

RANDY: Well, at least one consistency that I noticed in looking at the comments and listening to them was that they all sort of made it important to point out that none of the actions that they take would be inconsistent with what we’re getting from the economic data. So from your perspective what is the important economic data that we should be keeping an eye on over the next three weeks? And what should that data show in order for the Fed to be comfortable raising rates in September?

KATHY: The key report that we’re all going to be watching is the unemployment report for August. That’s released on Friday, September 2. If the increase in jobs is somewhere near the six-month average of about 180,000 or so, then it’s more likely that the Fed will raise rates sooner rather than later. Especially if it’s accompanied by a good increase in wages. Wages have been running about 2½% annual rate. If it’s that level or somewhat higher, then I think that they might move sooner rather than later.

RANDY: Well, all of this data and commentary can be very overwhelming even for seasoned investors, but especially for those who don’t have a lot of expertise in the bond market. So given what we know now and what we’re expecting over the rest of this year, what suggestions do you have for bond investors to help them deal with the potential bond market volatility that we might be seeing for the rest of this year?

KATHY: Well, I think, first of all, it’s good to understand what you own. So you might want to talk to your financial consultant or to one of our bond specialists and understand the types of bonds or fixed income investments you own and how they might react to a rate hike—as, you know, the Fed controls short-term rates, long-term rates may react very differently—and so you need to really understand what you own and how that will be influenced by a change in rates.

And then the second thing I would suggest is to understand the purpose of those investments in your overall portfolio. Do you own fixed income for the tax-exempt income, to reduce the volatility in the overall portfolio, offer capital preservation? All those are important reasons to own fixed income, and it may not be influenced too much by the trend in interest rates. So, again, we have the financial consultants and bond specialists that can help with all that.

Well, as always, Kathy, thank you for your expert insights. If you have questions, please call and talk to a Schwab financial professional. You can get more from Kathy about the bond market in Fixed Income and the Insights and Ideas section of Schwab.com. You can follow Kathy on Twitter @KathyJones, and of course you can always follow me on Twitter @RandyAFrederick. We will be back again. Until next time, invest wisely. Own your tomorrow.

Important Disclosures

Please note that this content was created as of the specific date indicated and reflects the authors’ views as of that date. It will be kept solely for historical purposes, and the authors’ opinions may change, without notice, in reaction to shifting economic, business, and other conditions. The information presented does not consider your particular investment objectives or financial situation (including taxes), and does not make personalized recommendations. Supporting documentation for any claims or statistical information is available upon request.

Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed-income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors.

Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.

Schwab Center for Financial Research (“SCFR”) is a division of Charles Schwab & Co., Inc.

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