The future of Interest Rates

To say that interest rates are low is an understatement.  If you compare interest rates of today to the last 40+ years, you’ll see why so many people are in a frenzy to either buy a new home or refinance their current mortgage(s).  In many cases, it makes more sense to buy a home than paying rent!  But how much longer will this last?  It’s safe to say that interest rates will rise – the question is: when?

As we currently stand, the economy isn’t recovering fast enough – even with short-term interest rates near zero.  Many economists are predicting that the Fed (Federal Reserve) will soon start buying up Treasury bonds to push down long-term interest rates…. so that 4.000% 30 year fixed-mortgage will be around for a little while longer.

People need to understand the reasons behind the Fed’s decision to buy new bonds.  Yes, buying new bonds will spur new spending activity as well as new investments that should pump new life into our struggling economy.  The stock market will almost certainly rise as savings pour more money into stocks in their search for higher returns.  But the true underlying reason for buying new bonds has to do with heading off deflation (a sustained period of falling prices).

Deflation is one of the worst blow-backs an economy can experience.  Falling prices mean lower business profits, which lead to layoffs and lower consumer spending and even further price declines.  It makes it more difficult to pay off debt because the value of debt rises relative to income.  It provokes businesses and consumers to hold on to their cash in anticipation that prices will continue to fall.  All this means is that the economy will take a long time to recover – similar to what happened in Japan’s economy in the 1990’s.

So we know that interest rates are low and will probably remain low for a few more months to come.  In my opinion, I believe interest rates will begin to creap up towards the 2nd quarter of 2011 – but again, nobody really knows.  For the time being, people should capitalize on these un-heard of interest rates while they still can.