Do you want the good news or the bad news? The good news is that people can finally earn interest on their savings. But the bad news is that mortgage rates (and other loans) are at 20 year highs…and going higher. It is the end of low interest rates. The end of “easy money”.
Interest rates peaked at the beginning of the 1980’s and were in decline until 2015. The Federal Reserve started the process of normalizing interest rates in 2016, but had to backtrack and implement emergency policy measures due to the Coronavirus Pandemic in 2020. Due to inflationary pressures unleashed from pandemic economic policy, the Federal Reserve has now raised the Federal Funds Rate from 0.0% to the current rate of 5.25% to bring down inflation.
The overnight rate of 5.25% is affecting interest rates across the yield curve. An overnight rate of 5.25% means that banks are now offering CD’s that pay over 5%. This is a boon for savers who have been dealing with minimal interest for the past 15 years. Be sure to check the interest rates at your bank. If you don’t move your money, your bank is most likely not paying a fair rate for your savings. In order to get a fair rate, you will need to purchase a CD or look at other financial institutions who are giving preferred rates to new accounts.
Unfortunately, higher interest rates also mean that if you are looking to purchase a new home, higher rates will make it more difficult to finance the purchase. Cash buyers have the upper hand. If you have any adjustable rate debt, be prepared for sticker shock. The Federal Reserve has a goal of attaining 2% inflation. While inflation has dropped down to below 4%, it will take time for the Fed to get back to 2% inflation. This inflation fight will require the Fed to keep interest rates higher for longer. As the bond market comes to grips with this “higher for longer” mantra, interest rates farther out in time will continue to rise, hopefully bringing us back to a normal yield curve.
Looking forward, it is hard to see a path back to a low interest rate environment. Instead, we are in “normal” times where you actually “get paid” to lend out your money.