What's an Unconventional Indicator You've Found to be Predictive of Future Interest Rate Movements?
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What's an Unconventional Indicator You've Found to be Predictive of Future Interest Rate Movements?
To uncover unconventional indicators of future interest rate movements, we asked financial experts for their surprising insights. From monitoring venture-capital funding to observing online gambling and crypto trends, here are the top four indicators these experts shared.
- Monitor Venture-Capital Funding
- Track Luxury Goods Market
- Watch Unemployment Rates
- Observe Online Gambling and Crypto Trends
Monitor Venture-Capital Funding
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.
Track Luxury Goods Market
Interest rates are a tricky beast. Everyone's always looking at the usual suspects: inflation, GDP, unemployment—the standard economic playbook. However, I’ve found that digging a little deeper can yield some surprising insights.
An interesting, albeit unconventional, indicator I've come across is the behavior of the luxury goods market. You see, when times are good, people tend to splurge on high-end items. This increased spending can actually signal an overheating economy, which often precedes interest rate hikes. Conversely, a sharp decline in luxury goods sales could suggest an economic downturn, possibly prompting interest rate reductions.
Of course, this method isn't foolproof. Other factors, such as fashion trends or celebrity endorsements, also play a role in luxury spending. However, when integrated with traditional economic data, it provides a unique viewpoint. It's akin to having a backstage pass to the economy, allowing you to observe things that others might overlook.
Watch Unemployment Rates
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.
Observe Online Gambling and Crypto Trends
As someone handling high-risk merchant accounts, I've observed that significant shifts in online gambling and cryptocurrency trading volumes often precede economic changes. These industries tend to be highly sensitive to disposable income and consumer confidence. A decrease in transaction volumes or average transaction sizes usually signals a tightening of consumer spending. This trend has frequently preceded periods of economic uncertainty, which influences interest-rate decisions.
