What’s Happening to Interest Rates?
It may not be an original question, but a relatively important one if you are deciding whether or not to lock the interest rate on your loan. Remember that long-term rates (more relevant to those focused on fixed rate financing) typically lag short-term rates (more relevant for floating/variable rate loans).
Rising Interest Rates are Mainly a Function of Three Things:
- Demand for Credit – If people and/or companies are borrowing more in the market, lenders will charge higher interest rates (to attract deposits and entice bond investors)
- Inflation – If there is too much money chasing too few goods and services in the economy, prices start to increase too rapidly (interest rates will increase in order to curtail demand, and to compensate for the decrease in purchasing power from artificial price increases)
- Monetary Policy – If the Federal Reserve sells U.S. securities, money is drained from the economy as lenders invest rather than lend to the public (a low supply of funds to lend increases the fed funds rate – the interest rate banks charge each other to borrow funds)
The recent good news on the unemployment rate (which could increase public demand for credit) was mainly due to the furloughed government employees returning to work. And, inflation is in check at 1%.
Here’s the Point: The amount of government debt has increased by over 150% in the past 10 years. Any material increase to interest rates would adversely affect the deficit, rendering even more budget problems for our current Administration.
