Can You Count On Rates Staying Low?
Interest Rates are at the lowest levels they have been at in over forty years. This is controlled by a variety of factors. Changes in the economy can trigger changes in interest rates. Seemingly unrelated events can affect the stock market, which can affect rates. Twenty years ago, Ross Perot made a statement that he had proof that the stock market was on the verge of collapse (no such proof existed). Over the next twenty-four hours, interest rates jumped up and down repeatedly, eventually settling up one-half of a percent.
Inflation - One of the major factors that determines rates is inflation. In order to make a profit, lenders need to charge a rate that exceeds the rate of inflation. If inflation is at 3 percent, something that costs $100,000 this year, will cost $103,000 next year. If inflation is at 7 percent, something that costs $100,000 this year, will cost $107,000. To effectively make a profit, the interest rate would need to exceed that, so the higher the inflation rate is, the higher interest rates are.
In addition to current inflation, the fear of impending inflation can also cause interest rates to rise. If lenders are afraid they will lose buying power when loans are repaid, they will raise rates to prevent that from happening. The more unpredictable the economy is, the more likely it is that this will occur.
The Federal Reserve - Rates are currently being kept artificially low by the Federal Reserve Board. The Federal Reserve, among other things, loans money to its member banks, which they in turn loan out to consumers. When they loan money out at a lower rate, banks can afford to loan it to the consumer at a lower rate. Additionally, the Federal Reserve has been engaged in a bond purchase program, designed to keep rates low. The Chairman of the Federal Reserve, Benjamin Bernanke, has said this will continue until unemployment levels drop below 6.5%.
International Events - A major crisis of almost any sort can make investors nervous. When investors are nervous, that can affect the stock market, interest rates and the overall economy. In most cases, fortunately, the change in rates in these circumstances is temporary.