THE STORM OF RISING INTEREST RATES

August has been a month of thunderstorms and on a recent afternoon flight home from Salt Lake City I knew there was a high likelihood I would be deviating around them once again. On this one-hour flight I left early in hopes of avoiding the weather, but storms can build very quickly and by the time I was halfway home a large weather system had formed in front of me.
 
As I approached the front I used all the advanced weather tools onboard to help me find a safe place to get past it. The storm was wide but there were areas that had not fully developed where I knew I could safely cross. One of the coolest devices I have in my plane for this situation is called a Cloud Topper. This instrument allows me to look forward and measure how high the clouds are many miles ahead of me. In an airplane you certainly don’t want to fly up to a convective cloud and find you have misjudged its height. The Cloud Topper compares my altitude to that of the clouds and flashes green or red depending on whether it is safe for me to cross. Having the right instrument made the otherwise dangerous weather a safe passage and I was soon comfortably back in my hangar.
 
Looking ahead economically, there are some storms rising before us that we need to pay attention to. One of these is rising interest rates. As an example, since last summer 30-year home mortgages have gone from 3% to nearly 5%. That is roughly a 60% increase. Our economy is strong but every uptick in interest rates takes families and businesses out of the market for the loans they need.
 
So far the rising rates have had minimal effect on our economy but as they climb, our ability to climb over them in our financial airplane will diminish. As I look through my version of an economic Cloud Topper, I am still seeing green on interest rates, but the red is getting closer. The good news is that rising interest rates are not all bad. For years, record low rates have made it difficult for retirees to find suitable income products. Now that rates are returning to more normal levels, these income opportunities are starting to open up again. Like finding a gap in a weather front, higher interest rates can actually offer a way through the economic storm if we shift some of our allocations to take advantage of them.
 
Dealing with storms or difficult weather is part of being a pilot. It doesn’t stop us from getting to our destination. We just use our instruments, experience and knowledge to find a way around it. Likewise, economic storms do not need to prevent us from reaching our financial destination. We just need to get out the old Cloud Topper and find an opening that we can pass though.