As a CFO and software engineer, I analyze countless financial indicators. One unconventional metric I’ve found surprisingly predictive is venture capital funding for startups. When VC funding accelerates, interest rates often rise within 6-18 months. For example, VC funding surged in late 2013. My models flagged this, so we advised clients to lock in fixed mortgage rates. The Fed began hiking rates in Dec 2015. More recently, VC funding peaked in mid-2018 then declined. We told clients lower rates were probable. The Fed cut rates three times by year-end 2019. VC funding signifies optimism and demand for risk capital. This stirs inflationary pressures, spurring the Fed to tighten monetary policy. The relationship isn’t perfect, but for a non-traditional indicator, VC funding has proven useful for forecasting rate changes both up and down. By the time most see the rise or fall in rates coming, we’ve already positioned our clients to benefit.
As an insurance executive with decades of experience, I’ve found unemployment rates to be a surprisingly strong indicator of interest rate changes. When unemployment drops, consumer confidence and spending tend to rise. This often leads the Fed to raise rates to prevent overheating. For example, in the late 1990s unemployment hit 30-year lows. My firm advised clients to lock in fixed mortgage rates, anticipating rate hikes were coming. Sure enough, the Fed raised rates six times in 1999 and 2000. More recently, the job market recovered from the financial crisis and unemployment declined steadily from 2010 to 2015. We again recommended clients lock in fixed rates, and the Fed raised rates for the first time in nearly a decade in December 2015, then four more times the following year. While not a perfect indicator, falling unemployment, especially when wage growth accelerates, is a simple signal that the Fed may tighten policy to keep inflation in check. When jobs are plentiful and pay is rising, interest rates are less likely to stay low for long. Pay attention to the help wanted signs.
As an independent wealth advisor, I've found the yield curve to be one of the most reliable indicators of where interest rates are headed. When the yield curve inverts, with short-term rates higher than long-term rates, it often signals that the Fed will start cutting rates soon. This is because inverted yield curves can slow economic growth by reducing the incemtive for banks to lend. For example, in December 2005 the yield curve inverted for the first time in years. My firm positioned client portfolios for lower rates by increasing bond durations. Sure enough, the Fed began cutting rates the following year. More recently, the yield curve inverted again in March 2019. We advised clients to lock in mortgage rates since lower rates were likely coming. The Fed cut rates three times before year-end. While far from perfect, the shape of the yield curve is a simple indicator that provides insight into what major bond buyers and sellers expect from the economy and interest rates. When it inverts, pay attention.
One unconventional indicator I've found surprisingly predictive of future interest rate movements is the sales of durable goods, like washing machines and refrigerators. When people are confident in the economy, they are more likely to make these big purchases, signalling economic strength. Conversely, a drop in durable goods sales can indicate that people are tightening their belts, hinting at a potential economic slowdown. By keeping an eye on these sales trends, I've been able to get an early sense of where interest rates might be headed, often before traditional indicators catch up.