Interest Rates On The Rise

Interest Rates On The Rise

Interest rates have risen dramatically in the last few months and this is not good news for any one.  The federal government has been purchasing about $85 billion per month on the bond market.  These huge purchases were artificially keeping interest rates low.  A few months ago the Federal Reserve Chairman claimed the US economy was strong and they will reduce the amount of bonds being purchased by the Federal Reserve.  you might be saying so what!  How will this impact me?  Well, rising interest rates are not good for the economy.  Everyone one and every company will be negatively impacted by higher interest rates.  The cost for companies to provide goods and services will rise and they will try to pass on these higher costs to consumers.  The alternative for companies is to reduce costs in other ways such as reducing staffing levels.  One immediate example is Wells Fargo.  The banking giant recently stated they will layoff about 2300 loan officers because the number of home owners refinancing their homes has reduced dramatically.  Title companies here in Albuquerque are reducing staff levels.  There was an article today the new home buying dropped dramatically.  If new home buyers are not buying as many homes, construction workers will lose their jobs.  This has been one of the slowest and most anemic recoveries in US history.

Higher interest rates will also cause higher costs of operations for local governments, state governments, and the federal government as all of them borrow money to fund their operations.  higher costs for government means the  government will need to raise revenues, typically by raising taxes.

Interest rates are not high from a long term historical perspective by any means.  However, the real issue is whether our economy is strong enough to withstand the recent increases.  More important, are interest rates going continue to rise or stay where they are.  In my opinion they are not going much lower that they are today.  We will all have to wait and see how this turns out.

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8/23/2013