We are currently, witnessing, a period, of time, with the longest, extended period, of historically, low, interest rates, in recent memory! While, there are many reasons, for this, it may be, beneficial, to better understand, the fundamentals, and relationships/ ramifications/ impacts, of this sort of prolonged, extended period. However, it’s also important, to recognize, since, we have never witnessed this, before, our concepts are based on theories, concepts, and apparent, common sense. Will interest rates, remain, this low, and become, the New – Normal, or, will, we, once again, see cycles, over – time? With that in mind, this article will attempt to, briefly, consider, examine, review, and discuss, 4 questions, and whether, it will, in the longer – run, create undesirable ramifications.
1. Historic lows – How low, will rates go?: In the last year, or two, many have believed, we experienced, the lowest rates, only, to discover, they went, even – lower! Although, these are historic lows, how low, will they go? We observe mortgage interest rates, which have never been lower, in recent memory, and the impacts. In housing, it means, a buyer, can purchase, more house, for – his – bucks, because, it creates low monthly payments, etc. It also means, individuals, can qualify for bigger loans, because, their monthly expenditures, are a lower percentage of one’s overall income, etc. When, banks pay, such low – interest, and bonds, such, low dividends, it contributes, strongly, to the rising stock market, for a number of reasons, including, it being, the only game, in – town! However, banks and lenders, also, reap large profits, because, they still charge high rates, on credit cards, and, other, unsecured – consumer loans! It helps car dealers, because, especially, lease rates, but, also car loans, becomes more attractive!
2. Historically, rates fluctuate?: Will they do so, this time?: A review of historic trends, indicates, rates fluctuate, over – time. Since, they seem to have usually done – so, will this occur again, and, if – so, when? Since, the United States budget deficit is also, at a record – high, will that prolong, or reduce, this current period?
3. Relationship between rates and stocks: Because, when rates are low, using bank vehicles, or bonds, bills, etc, become less attractive, largely, because, they may not, even, keep – up, with the inflation rate, especially, in the long – term! Therefore, the stock market, usually benefits, because, many borrow cheap – money, and invest it, in stocks, and, it also, becomes, the only game, in – town!
4. If this continues, what will Federal Reserve use, as new/ future incentives. stimulus: Historically, the Federal Reserve, used lower rates, to stimulate investing, and/ or, spending. If this becomes the New – Normal, what will be the weapons, available, etc?
Will this become the New – Normal, or, just, a temporary, cyclical occurrence? The smartest strategy is to understand impacts, and be prepared!