You may have noticed that the Federal Reserve last month shocked everyone by announcing that they were not raising interest rates. It was widely expected that the Fed would raise interest rates to combat inflation and ease tension on Wall Street. The Fed cited uncertainty and instability around global markets (i.e. China) as the main reason for staying put with near-zero interest rates. While many applauded the move like consumers in the market to buy a home or a car, there are at least three reasons why keeping interest rates low in the long term is a bad idea.
1) The economy has been doing fairly well in most parts of the country but at the expense of an enormous financial debt that is being passed on to our children. In the event that the economy starts to slip and go back towards a recession, the Fed has no tool to help turn it around. The longtime belief was that the Fed could prop up the economy by lowering the cost to borrow money for nothing or almost nothing. Since we are already there, the Fed would be powerless to help if the nation’s economy slips.
2) Investors are pouring money into the stock market because it doesn’t make sense to put money in a bank with interest rates so low. You can make more money even in a volatile stock market than you can in your local bank. We saw this trend in the 1990’s, and it was one of the primary reasons that caused the Tech bubble to burst. We also saw this trend in the mid-2000’s that helped create the housing crisis. By keeping interest rates so low, it appears that we are following this same pattern again.
3) In this current environment, spenders are rewarded, and savers are punished. Low-interest rates will help people buy cars and homes. Businesses can spend more money on production and development, but what if you are a saver? What if you are retired looking to earn income from savings accounts and bank CD’s? These people have been hurt the most since interest rates have been in the toilet since 2008.
Interest rates cannot stay this way forever for a healthy economy. Companies are holding large surpluses of inventory driving down prices, people are becoming over-leveraged, housing is surpassing new value highs every day, and the world economy is shaky at best. I am no financial expert, but it appears to me that this is the time to raise interest rates. The Fed Chair Janet Yellen said they’ll look at it again in October so let’s hope that they make the right decision.
Dan Polimino is a Broker/Owner with the Colorado Dream House Team, Keller Williams Realty DTC. Contact the Colorado Dream House Team at 720-446-6325, Follow us on Twitter, Like us on Facebook, Watch us on YouTube