With QE Ending, Will Interest Rates Rise? BLOG
October 30, 2014 by Linda Koco
The Federal Reserve news that the government’s Quantitative Easing (QE) program will end this month is bound to set off a new round of what-iffing in the life and annuity industry.
Will interest rates start rising soon? If so, when? What to do now, if anything?
This is not the first time that industry professionals have asked such questions. The Fed launched its asset purchase program in late 2008 as a means of stimulating the economy in response to the great recession. In the ensuing years, interest rates began plunging. Initially, there was a lot of hopeful talk in insurance corridors about how rates might come back up in a year or so. Many speculated on what would happen next.
But as we all know, the “prolonged low interest rate environment” hung on and on. So the industry focus turned to “dealing with now.” This era ushered in widespread de-risking strategies, policy feature curtailments, commission cuts, and other changes designed to ease strain on insurance company capital and ensure solvency. The transition was painful for just about every sector of the industry.
The situation continued for so long that some industry professionals now tell me they have become accustomed to working in the low interest rate environment and wouldn’t mind it continuing.
But they might be facing change again. The Federal Open Market Committee (FOMC) has now, as the Fed put it, “decided to conclude its asset purchase program this month.”
Most onlookers have assumed that, when QE ends, more traditional market conditions will return. That includes higher interest rates. Whether this will happen, and if so, how, remain to be seen. But the expectation is there.
Ten-year bond rates, long considered a benchmark for interest rate trends, reacted to the first blush of QE news. The Fed’s announcement arrived in my inbox at 2:08 p.m. on Oct. 29. By the market close at 4 p.m., the 10-year bond rate had increased 48 basis points to 2.232 percent.
That’s not a huge uptick. And the 10-year has certainly seen higher rates in fairly recent times; for instance, the 10-year rate was a hair above 3 percent at the end of 2013. Still, the 10-year increase, combined with the day’s FOMC news, is enough to start the insurance wheels to turning.
Could this day mark the “bottom” of the era of the low interest rate? Might this be the time to look at adjusting budgets and projections with the potential for more robust interest rates? Should advisors resume discussions with clients about products and strategies that have enough flexibility to respond to potential upturns in crediting rates offered in interest-sensitive life and annuity policies? Should retirement income plans be tweaked or adjusted in light of this development? Do asset allocation decisions need to be revisited?
None of these are new questions. It helps to think of them more as resumed questions. However, this time around, the questions might have a little more backbone to them than previously, precisely because QE is finally ending.
